Elan drug trial inside trader sentenced to nine years in prison

Mathew Martoma has been sentenced to nine years in prison for carrying out one of the biggest insider trading schemes on record in 2008 when he was working as a portfolio manager at Steven Cohen's former hedge fund, SAC Capital Advisors.

Martoma sought confidential information from doctors involved in a clinical trial of an Alzheimer's drug being developed by Irish group Elan, since acquired by Perrigo , and Wyeth, now a unit of Pfizer. Based on a tip Martoma received from Sidney Gilman, a former University of Michigan professor who chaired the drug's safety monitoring committee, SAC Capital in July 2008 began selling its $700 million position in Elan and Wyeth, prosecutors had told the court.

The sentence was in line with what the government was seeking. Prosecutors working for Preet Bharara, US attorney for the Southern District of New York, had asked for a prison term of eight years or more for Martoma, who was convicted in February by a federal jury in Manhattan. Martoma’s lawyers had simply asked Judge Paul Gardephe to show mercy and sentence him to a significantly shorter term.

In handing down the sentence, Judge Gardephe said: “The sums here are staggering and the size of the punishment must be sufficient to deter others.”

Martoma was also ordered to forfeit a $9.38 million bonus he earned while working at SAC in 2008.

Martoma was silent during the sentencing hearing. His wife, Rose, seated in the front row, could be seen wiping her eyes at times.

Hours before the sentencing hearing was scheduled to begin in a Lower Manhattan courtroom, Judge Gardephe indicated his thinking about Martoma’s sentence for making illegal trades in shares of two drug companies, Elan and Wyeth.

In a 25-page decision issued early yesterday, the judge said that it was appropriate for him to consider all of the $275 million in profits and avoided losses made both by Martoma and his former boss.

He noted that while prosecutors did not name Mr Cohen as a co-conspirator, the evidence at trial proved that Martoma “provided inside information to Cohen and this information was the basis for Mr Cohen and SAC Capital’s subsequent trades in Elan and Wyeth securities”.

Martoma and his lawyer had hoped to exclude Cohen’s substantial trading to limit the amount of prison time he could be eligible for under the federal sentencing guidelines.

Martoma was convicted of using inside information about a clinical trial for an experimental Alzheimer’s drug to help SAC make trades in shares of the two drug companies.

The trades in Elan and Wyeth – which involved SAC’s dumping large positions in both stocks ahead of the release of negative information about the clinical trial – took place over just a few days in July 2008.

Martoma (40) had said that sentencing him to a long prison term would present an undue hardship on his wife, a nonpracticing physician, and their three young children. Martoma and his lawyers had argued that it was unfair for him to receive a long prison sentence for what was essentially a single incident of insider trading.

Prosecutors countered that the number of trades was irrelevant because the improper trading helped SAC generate the $275 million in profits and avoided losses.

The authorities also noted in court filings that Martoma was expelled from Harvard Law School for altering his law school transcript several years before he began working for SAC.

The sentencing of Martoma closed another chapter in the federal government’s investigation into Mr Cohen and his hedge fund, which lasted for more than seven years.

SAC was one of the most successful hedge funds before the firm pleaded guilty to insider trading and was forced by the government to stop managing money for outside investors. Federal prosecutors never charged Mr Cohen with any wrongdoing, but he still faces a civil regulatory action that could permanently bar him from ever working in the securities industry.

In pleading guilty, SAC paid $1.2 billion in fines and penalties to federal prosecutors. The firm also paid a little more than $600 million in fines and restitution to the Securities and Exchange Commission.

Martoma is the eighth trader or analyst to work for Cohen to either be convicted at trial of insider trading or plead guilty to charges of improper trading.

Martoma’s lawyer, Richard Strassberg, a partner with Goodwin Procter, has indicated his client is likely to appeal his conviction. – Copyright New York Times service 2014