U.S. Atty. Preet Bharara discusses the allegations against Mathew Martoma,… (Louis Lanzano, Associated…)
NEW YORK — After building a huge stake in two drug companies, hedge fund manager Mathew Martoma told his powerful boss on a Sunday morning that they had to immediately dump their position.
It was an unusual request even by the outsized standards of Wall Street, but the hedge fund quietly liquidated its $700-million position within days.
Federal authorities suggested Tuesday why Martoma was in such a hurry back in 2008 — he'd allegedly gotten an illegal tip about big problems with the companies' developmental Alzheimer's drug. It was the most profitable insider-trading scheme in U.S. history, netting $276 million in profit and avoided losses, according to prosecutors.
But it resulted in criminal charges against Martoma and a swirl of questions about his boss, Steven Cohen, who is one of the most celebrated figures on Wall Street.
Cohen is worth an estimated $8.8 billion and lives in a 35,000-square-foot mansion in Greenwich, Conn., that includes an ice rink and Zamboni machine. He helped bankroll a failed bid last year to buy the Dodgers.
His firm, SAC Capital Advisors, has drawn attention in recent years as the government launched a massive crackdown on insider trading.
The hedge fund reportedly told clients it received a subpoena seeking a "broad" array of documents in late 2010. Around that time, two hedge funds founded by SAC alumni were raided by FBI agents as the government pursued its insider probe.
Martoma is the fifth person affiliated with SAC Capital to be charged in insider-related cases. Cohen's ex-wife sued him three years ago, alleging that her former husband amassed his fortune partly through insider trading.
Cohen was not named in the dual federal and civil complaints Tuesday, but experts said the government might have him in its sights.
In a civil complaint filed by the Securities and Exchange Commission, Cohen is referred to as "Portfolio Manager A," the Wall Street Journal reported. The companion criminal action lists Cohen as the "owner" of hedge funds involved in the scheme, the Journal said.
"He is to hedge funds what Michael Milken, back in the '80s, was to investment bankers," said John Coffee, a law professor at Columbia University. "The government seems to be within one move of getting a key witness against one of the most important figures in the new universe of hedge funds."
An SAC spokesman disputed that.
"Mr. Cohen and SAC are confident that they have acted appropriately and will continue to cooperate with the government's inquiry," the spokesman said in a statement.
Martoma's lawyer denied wrongdoing by his client.
"Mathew Martoma was an exceptional portfolio manager who succeeded through hard work and the dogged pursuit of information in the public domain," the lawyer, Charles Stillman, said in a statement. "What happened today is only the beginning of a process that we are confident will lead to Mr. Martoma's full exoneration."
The case revolves around a drug developed by Irish biotechnology company Elan Corp. and New Jersey-based pharmaceutical giant Wyeth, which was acquired by Pfizer Inc. in 2009.
Martoma specialized in healthcare stocks for an SAC unit called CR Intrinsic. He got a series of tips about the drug, bapineuzumab, from Dr. Sidney Gilman, a neurology professor at the University of Michigan, the government said.
Gilman consulted for Elan and Wyeth. Martoma was connected to Gilman by an "expert network" that matches investors with specialists in various fields.
After initial optimism about bapineuzumab, a clinical trial showed disappointing results. Gilman allegedly alerted Martoma to the test results shortly before public disclosure in July 2008, prompting Martoma's 8:52 a.m. email to Cohen.
The subsequent selling accounted for a whopping 20% of Elan's trading volume and 11% of Wyeth's at one point, according to the FBI. The fund even bet against the companies by "shorting" their stocks.
"And so, just like that, overnight, Martoma went from bull to bear as he tried to dig his hedge fund out of a massive hole," Preet Bharara, the U.S. attorney in Manhattan, said at a news conference.
Elan shares slumped 42% the day after the results were revealed.
Martoma is the fifth former SAC employee and the 73rd defendant accused of insider trading by Bharara's office since August 2009. Of those defendants, 69 have been convicted, most of them through plea agreements.
Bharara's office agreed to not prosecute Gilman, 80, in exchange for his testimony.
Martoma, 38, got an annual bonus of $9.3 million, primarily stemming from the profits in Elan stock, according to the government.
He got no bonus after disappointing years in 2009 and 2010 and was terminated in 2010. According to the government, an email recommending his termination said Martoma appeared to be a "one trick pony with Elan."