Net closing in SAC Capital Advisors insider trading case

Mathew Martoma may have the one thing prosecutors have been unable to find in their probe of SAC Capital Advisors: a direct link between founder Steven Cohen and insider trading.

Having refused to co-operate, Martoma now faces trial for what the government claims was the biggest illegal trade in US history.

Jury selection began on Tuesday but after two days, lawyers still had not selected the 12-member panel, with the judge overseeing the case expressing concerns that he might have to bring in a fresh group of candidates, postponing opening statements by another day.

The indictment accuses Martoma of obtaining secret information from a doctor about clinical trials for an Alzheimer's drug. Just after Martoma learned that the trials produced negative results, he spent 20 minutes on the telephone with Steve Cohen, the fund's billionaire founder who has long been a focus of the federal government's investigation. A day later, SAC dumped its shares in the two companies developing the drug, Elan and Wyeth, a move that the authorities say helped Cohen's firm avoid losses and generate profits totaling $276 million.

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Manhattan US attorney Preet Bharara called it "the most lucrative insider trading scheme ever charged". But his office stopped short of implicating Cohen, or claiming that Martoma told his boss about the secret information.

Pressure on Martoma (39) to co-operate with the probe included an approach by agents of the Federal Bureau of Investigation that made him faint in his own front garden, and an indictment unsealed in 2012 on the Friday before Christmas.

The fainting episode is among issues that US district judge Paul Gardephe, who is hearing the case, has ruled cannot be used in court by the prosecution. Also barred is the fact that two years after he made $9.3 million in bonuses on the alleged insider trading deal, Martoma was fired from SAC in 2010 for poor performance.

However, the judge ruled on Wednesday against his legal team's efforts to introduce in evidence from Cohen's testimony in a day-long deposition taken in 2012 by the US Securities and Exchange Commission. Martoma claims Cohen's testimony shows that SAC sold its Wyeth stock on the advice of Wayne Holman, a former SAC employee who left and started Ridgeback Capital Management, not because of anything Martoma said.

SAC Capital International, which paid $789.5 million to Cohen and his managers, was the most-profitable hedge fund in 2012, according to Bloomberg data. Cohen isn’t on the most-profitable list this year because he is returning investors’ money as his firm settles criminal charges from the US government.

A steady drumbeat of convictions of insider traders in the probe, including SAC portfolio manager Michael Steinberg last month, may have further ratcheted up the pressure ahead of the trial in Manhattan federal court.

“I think Martoma was the likeliest link to Cohen,” said Glenn Gitomer, a partner with the law firm McCausland Keen and Buckman in Radnor, Pennsylvania, who’s following the case. “Martoma’s the one with the 20-minute phone call. Depending on what happened, that either gets them there or doesn’t.”

Cohen, who hasn’t been charged, has said he did nothing wrong. Jonathan Gasthalter, a spokesman for SAC at Sard Verbinnen, declined to comment on the Martoma trial.

“Mathew continues to fight the charges and is preparing for trial,” his lawyer, Richard Strassberg, said in an email. History suggests he may face an uphill battle. Prosecutors in Bharara’s office have filed insider-trading charges against 83 people and four entities – all of them units of SAC – in a six-year probe of fund managers, company insiders and expert networking firms.

In November, SAC agreed to plead guilty to securities fraud and end its investment advisory business as part of a record $1.8 billion settlement of the government’s investigation of insider trading at the firm.

The agreement must be approved by a judge before it can take effect.

Bharara’s office has so far won 78 convictions, most of them through guilty pleas. No one has been acquitted of insider- trading charges in that time.

In the most recent trial in Manhattan federal court, a jury took less than two days to convict Steinberg last month of using illegal tips on technology stocks from his former securities analyst, Jon Horvath, to make more than $1.4 million in illegal profits.

If convicted, Martoma, who has pleaded not guilty, faces as long as 20 years in prison on each of two securities-fraud counts and five years for a single conspiracy charge.

Prosecutors in Martoma's case plan to call two physicians who allegedly gave him inside information about drug tests and their disappointing results. The doctors, former University of Michigan neurologist Sid Gilman, and Joel Ross, a New Jersey geriatrician and clinical associate professor of medicine at Mt. Sinai School of Medicine, have both been given non-prosecution agreements in exchange for their testimony.

Martoma made a $9.3 million bonus from trades on the doctors’ information, the government claims.

“They’re really going to have to attack the doctors’ credibility,” said Anthony Sabino, a law professor at St John’s University in New York. But Martoma’s lawyers will have to be careful not to push Gilman and Ross too hard for fear of losing credibility with the jury, Sabino said.

“People are less likely to find fault with a doctor than with a Wall Street guy,” he said.

The trial is expected to take three weeks, lawyers told Gardephe. – Bloomberg / Reuters / New York Times service 2014