Cohen Traded On Secret Tips, Biggest Insider-Trading Case Alleges

Nov 20 2012 | 1:39pm ET

A former SAC Capital Advisors portfolio manager has been charged with insider-trading in the first-ever such case to refer specifically to SAC founder Steven Cohen.

Cohen is neither charged nor mentioned by name in the civil lawsuit filed by the Securities and Exchange Commission that parallels the criminal case against Mathew Martoma. But he is the person referred to as "Portfolio Manager A" in the lawsuit and is referred to as the "owner" of the hedge funds in the criminal complaint.

According to the complaint, Portfolio Manager A authorized many of Martoma's trades allegedly based on confidential information, while simultaneously rejecting those of others at the firm who differed with Martoma. The complaint does not indicate that Cohen knew that Martoma's trades may have been based on confidential information.

Martoma, who worked at SAC's CR Intrinsic division, was charged today in what prosecutors called "the most lucrative insider-trading scheme ever." Martoma allegedly earned SAC some $276 million trading on confidential information about Alzheimer's drug trials at pharmaceutical companies Elan Corp. and Wyeth LLC. The tips were allegedly supplied by a neurology professor, Sidney Gilman, who headed the safety committee overseeing the drug trials and also worked for an expert network. Gilman, who was paid more than $100,000 for meetings with CR Intrinsic and another firm, was named in the SEC complaint along with Martoma and CR Intrinsic. He met with Martoma 42 times, the SEC said.

Gilman is cooperating in the investigation and has reached a non-prosecution accord with the government.

The trades, which allegedly contributed to a $9.4 million bonus in 2009 for Martoma, took place between 2006 and 2008. On one occasion in the latter year, upon allegedly learning negative information about the two stocks, Martoma said it was "important" that he speak with Portfolio Manager A, and allegedly told him he was no longer "comfortable" with SAC's big investments in the stocks. The following day, Portfolio Manager A sold off hundreds of millions in the companies' shares.

"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," U.S. Attorney Preet Bharara said.

Martoma, who left CR Intrinsic in 2010, was arrested this morning at his Boca Raton, Fla., home, and is expected to appear in federal court there later today. He faces conspiracy and securities fraud charges and could be sentenced to decades in prison if he is convicted.

"Mathew Martoma was an exceptional portfolio manager who succeeded through hard work and the dogged pursuit of information in the public domain," Martoma's lawyers said. "What happened today is only the beginning of a process that we are confident will lead to Mr. Martoma's full exoneration."

SAC did not comment.

Martoma is among more than 70 people charged in the government's recent crackdown on insider-trading. He's also the latest insider-trading link to SAC. Former SAC analyst Jon Horvath recently pleaded guilty to insider-trading, implicating both his boss, Michael Steinberg, and Cohen, neither of whom has been accused of wrongdoing. Two other SAC vets, Noah Freeman and Donald Longueuil, pleaded guilty last year to insider-trading. Also last year, former SAC analyst Jonathan Hollander settled SEC charges that he traded illegally; Hollander was not charged criminally. Other SAC veterans who have pleaded guilty to insider trading include Richard Choo-Beng Lee, who said he traded illegally while at SAC, and Joseph Skowron, who pleaded guilty to doing so at FrontPoint Partners.

SAC itself has faced a number of insider-trading probes, but none have borne fruit. The hedge fund was a client of Broadband Research, whose founder, John Kinnucan, pleaded guilty to passing tips to hedge fund managers earlier this year. Federal investigators had asked Kinnucan to wear a wire in his dealings with Steinberg, but he refused.

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