‘Most Lucrative Insider Trading Scheme Ever’: Trader With SAC Ties Charged With Illicit $276 Million Score
A complaint filed in U.S. District Court in Manhattan Tuesday alleges that a portfolio manager at an unregistered investment advisor made a $276 million score by trading on insider information from a neurology professor conducting a clinical trial of an Alzheimer’s drug.
The complaint says Matthew Martoma, while working at CR Intrinsic Investors, received material nonpublic information from Dr. Sidney Gilman of the University of Michigan’s Medical School, who was in charge of a committee overseeing the trial of a drug being developed by Elan Pharmaceuticals and Wyeth in 2008 (Wyeth has since been acquired by Pfizer).
Gilman — also named as a defendant along with Martoma and CR Intrinsic — allegedly gave Martoma information about the clinical trial and at some point around July 17, 2008 provided the full results of the study before its July 29 release. That led to Martoma causing CR Intrinsic and affiliated portfolios of another investment advisor (unnamed in the complaint) to sell long positions in Elan and Wyeth worth more than $700 million and take substantial short positions. All told, the SEC claims Martoma and the affiliated funds sold more than $960 million worth of the two stocks’ in just over a week, reaping a $276 million windfall. For his success, Martoma, who was arrested at his Florida residence Tuesday, took home a bonus of more than $9 million.
The holdings of the unnamed investment advisor — over $293 million of Wyeth stock and over $95 million of Elan securities as of June 30, 2008 — correspond to the holdings reported by SAC Capital Advisors in its Aug. 14, 2008 13F filing, disclosing long equity positions at the close of the second quarter. Reuters and DealBook reported Martoma’s ties to SAC, of which CR Intrinsic was an affiliate.
In a separate criminal complaint, prosecutors allege that Martoma recommended the owner of the unnamed hedge fund sell its Wyeth and Elan holdings, and that the hedge fund owner then instructed a trader to begin selling its position.
A spokesman for SAC, the firm founded by billionaire Steve Cohen, did not immediately respond to a request for comment.
The relationship between Gilman and Martoma was facilitated by an expert network firm, an industry that has been at the heart of a number of insider trading cases brought by Preet Bharara in recent years, cases that have put the likes of Galleon Group founder Raj Rajaratnam behind bars.
Martoma is also facing criminal charges for conspiracy to commit securities fraud from Bharara’s office. Gilman appears to be participating with prosecutors, as a neurology professor at a leading medical school is listed as a “cooperating witness” who has entered into an non-prosecution agreement with the authorities.
Bharara, who will hold a press conference to detail the charges in New York with SEC Enforcement Division Director Robert Khuzami and the FBI’s April Brooks, issued the following statement:
Today yet another privileged hedge fund professional stands accused of insider trading. The charges unsealed today describe cheating coming and going – specifically, insider trading first on the long side, and then on the short side, on a scale that has no historical precedent. As alleged, by cultivating and corrupting a doctor with access to secret drug data, Mathew Martoma and his hedge fund benefited from what might be the most lucrative inside tip of all time. As Martoma allegedly got sneak peeks at drug data, he first recommended that the hedge fund build up a massive position in Elan and Wyeth stock, and then caused the fund to shed those shares after getting a secret look at the unexpectedly bad results of a clinical drug trial. And so, overnight, Martoma went from bull to bear. As a result of the blatant corruption of both the drug research and securities markets alleged, the hedge fund made profits and avoided losses of a staggering $276 million, and Martoma himself walked away with a $9 million bonus for his efforts. The SEC and FBI deserve particular praise for uncovering the facts leading to today’s charges.