SAC Capital ex-manager convicted in trading case

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A Manhattan jury on Thursday convicted a former SAC Capital Advisors portfolio manager of what prosecutors described as the most lucrative insider trading scheme ever, adding to the troubles of the beleaguered hedge fund and its billionaire owner, Steven Cohen.

After more than two days of deliberation, the jury found Mathew Martoma guilty of receiving secret tips from a neurologist about the results of a clinical trial involving an Alzheimer's drug, enabling SAC to make $275 million in profits or avoided losses.

In recent years, U.S. Attorney Preet Bharara has exacted the guilty pleas or convictions of seven other former portfolio managers or research analysts accused of illegal trading while at SAC. But Mr. Martoma's case stood out because it was the first to tangentially connect Mr. Cohen, the firm's founder, to an illegal transaction.

"What's striking is the U.S. attorney's office has an unbroken string of convictions or guilty pleas against everyone except the presumed target, Steve Cohen," said Thomas Gorman, a securities attorney at Dorsey & Whitney.

Mr. Cohen has not been accused of criminal wrongdoing. But Mr. Bharara announced in November that his hedge fund had agreed to pay $1.2 billion to settle charges that it tolerated rampant insider trading for more than a decade. It also agreed to stop managing the money of outside investors, but it can continue to manage Mr. Cohen's fortune.

In the years leading up to that settlement, six of the hedge fund's former employees had pleaded guilty to insider trading charges for activities from 1999 through at least 2010. Michael Steinberg, one of Mr. Cohen's top lieutenants, fought similar charges in court. But a Manhattan jury convicted him in December.

Mr. Martoma, a 39-year-old father of three young children, plans to keep fighting. He faces years, if not decades, behind bars. "We are disappointed and are planning an appeal," his attorney, Richard Strassberg, said in a statement. An SAC spokesman declined to comment.

The crackdown on the hedge fund is part of Mr. Bharara's aggressive bid to purge Wall Street of illegal trading. Mr. Martoma ranks as the 79th person convicted of insider trading after a trial or by guilty plea as part of that broader effort.

"In the short run, cheating may have been profitable for Martoma, but in the end, it made him a convicted felon, and likely will result in the forfeiture of his illegal windfall and the loss of his liberty," Mr. Bharara said in a statement.

The government alleged that an expert network firm connected Mr. Martoma to Sidney Gilman, a doctor who headed the committee that oversaw the clinical trial of an Alzheimer's drug under development by Elan, now part of Perrigo, and Wyeth, now part of Pfizer.

Prosecutors said Dr. Gilman tipped off Mr. Martoma to the trial's negative results about two weeks before those results were made public in July 2008. The government alleged that Mr. Martoma spoke to Mr. Cohen by phone on a Sunday after receiving the illegal tips, and SAC started liquidating its shares in the drug companies the following trading day.

A point of intrigue leading up to the trial was whether Mr. Martoma would turn on Mr. Cohen, whose stellar returns made him a mythical figure in the hedge fund world. Prosecutors have long suspected that those gains were too good to be true. But Mr. Martoma did not point a finger at his former boss. Now he may, said Jordan Thomas, a partner at Labaton Sucharow.

"At some point, he might have thought he could pull an O.J. Simpson and beat the rap," said Mr. Thomas, a former Justice Department trial attorney. "But if he's facing many years in jail, he could choose to cooperate. His value to the government is less because he's told one story, and telling another would be less valuable. But if he has individual corroboration of potential misconduct by SAC or Mr. Cohen, that's another matter."

The prosecution's case relied heavily on Dr. Gilman, 81, who will not face criminal charges because he cooperated with the government. The neurologist told the jury that he leaked secret information to Mr. Martoma about the drug. In closing arguments, the prosecution said Dr. Gilman was the equivalent of a "canary in the coal mine" for Mr. Martoma.

But the defense attacked Dr. Gilman's motives and memory and suggested that much of the information Mr. Martoma relied on was public. Mr. Martoma's lawyers said the government hastily went after their client just to snag Mr. Cohen. Dr. Gilman testified that federal agents told him as much when they questioned him.

Thursday's verdict can complicate the legal battles that Mr. Cohen faces. The Securities and Exchange Commission brought a civil case against him in July, alleging that he failed to supervise Mr. Steinberg and Mr. Martoma. Mr. Martoma's conviction could help the SEC make its case, several legal experts said.

Previously, the agency had reached a $616 million civil settlement with two SAC affiliates that were allegedly involved in insider trading, and that deal awaits court approval. Part of the $1.2 billion deal that Mr. Bharara announced in November also needs court approval.

At the time, Mr. Bharara implied that Mr. Cohen remains in his team's cross hairs. He said the plea agreement did not provide criminal protection or immunity for any individuals.


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