A former hedge fund portfolio manager was arrested on Tuesday in what prosecutors called perhaps the most lucrative insider trading scheme of all time — an arrangement to obtain secret, advance results of tests on an experimental Alzheimer’s drug that helped his fund and others make more than US$276 million.
The case also led authorities to investigate the activities of one of the nation’s wealthiest hedge fund managers, Steven Cohen.
The portfolio manager, Mathew Martoma, was accused in the US District Court in Manhattan of using the information to advise other investment professionals to buy shares in the companies developing the drug, then later to dump those investments and place financial bets against the companies when the tests returned disappointing results.
“The charges unsealed today describe cheating coming and going,” US Attorney Preet Bharara said at a news conference.
The scheme unfolded “on a scale that has no historical precedent.”
Martoma’s trades helped reap a hefty profit from 2006 through July 2008, while he worked for CR Intrinsic Investors LLC of Stamford, Connecticut, an affiliate of SAC Capital Advisors, a firm owned by Cohen.
Cohen is not referred to by name in court papers, but is frequently alluded to for his dealings with the defendant in the weeks leading up to an announcement about the drug trial.
The government has been scrutinizing SAC since at least November 2010, when the FBI subpoenaed SAC and other influential hedge funds. Martoma is the fourth person associated with SAC Capital to be arrested on insider trading charges in the last four years.
SAC spokesman Jonathan Gasthalter said the company and Cohen “are confident that they have acted appropriately and will continue to cooperate with the government’s inquiry.”
The FBI said the scheme developed after Martoma met a doctor in Manhattan involved in an Alzheimer’s drug trial in October 2006. According to a criminal complaint, he later obtained confidential information related to the final results of a drug trial.
Martoma’s attorney, Charles Stillman, called his client “an exceptional portfolio manager who succeeded through hard work and the dogged pursuit of information in the public domain.”
“What happened today is only the beginning of a process that we are confident will lead to Mr Martoma’s full exoneration,” he said. Martoma was arrested at his home in Boca Raton, Florida, and made an initial appearance in federal court in West Palm Beach, Florida, where he was released on US$5 million bail on charges of conspiracy to commit securities fraud and securities fraud. He is scheduled to return to court Monday in Manhattan.
The Securities and Exchange Commission filed civil papers in the case against CR Intrinsic Investors, Mathew Martoma and Dr Sidney Gilman. The civil complaint said the illegal money was earned in July 2008, when various hedge funds traded ahead of a negative public announcement involving the clinical trial results of an Alzheimer drug being jointly developed by Elan Corp and Wyeth.
The SEC complaint said that Martoma carried out the scheme with Gilman, an 80-year-old professor of neurology at the University of Michigan Medical School, who served as chairman of a safety committee overseeing the clinical trial.
Gilman was selected by Elan and Wyeth to present the final clinical trial results at a July 29, 2008, medical conference.