Saturday, 22 October 2016
Last updated 10 hours ago
Nov 26 2012 | 3:01pm ET
Before arresting him last week in what they called the "most lucrative insider-trading scheme ever," federal authorities sought a former SAC Capital Advisors portfolio manager's help in snaring the hedge fund's famed founder, Steven Cohen.
Cohen was not charged alongside Mathew Martoma last week with illegally trading pharmaceutical stocks on confidential information about drug trials. But the case against Martoma represents the first time that Cohen, identified in court documents as "Portfolio Manager A" and the "owner" of the hedge fund Martoma worked for, has been directly linked to allegedly insider-trading.
It has not been for lack of trying. Prosecutors have had SAC, and Cohen in particular, in their sights for years. But despite trying to build a case against him, prosecutors haven't been able to find conclusive evidence that Cohen knowingly traded on insider information and have failed to flip any witnesses against him, as they have done in other successful insider-trading prosecutions.
"It appears that the government is sending the message that they believe the owner of the hedge fund is acting alongside Mr. Martoma," former federal prosecutor Brad Simon told Bloomberg News. "This would indicate to me that the government's investigation is moving up the chain at a very rapid pace."
At their press conference on Saturday, the U.S. Attorney's Office in Manhattan did nothing to disabuse people of the notion that Cohen is their ultimate target.
"In this instance, what we see is an unholy alliance between an insider willing to divulge valuable, non-public information and a money manager who knew that information is as good as gold," Federal Bureau of Investigation agent April Brooks said. "Martoma and the owner of the hedge fund that employed him traded heavily and aggressively on the expert's information based on inside information in advance of the favorable announcement."
A year before arresting him on Tuesday, authorities, including FBI agent Matthew Callahan, visited Martoma's Boca Raton, Fla., home and asked him to help them get the desired dirt on Cohen. Martoma refused, The Wall Street Journal reports.
"Mr. Cohen and SAC are confident that they have acted appropriately and will continue to cooperate with the government's inquiry," SAC said last week.
Prosecutors may not have given up on Martoma, however.
"That they're proceeding by a complaint, as opposed to an indictment, often means the government wants to convince the defendant of the wisdom of cooperation," former federal prosecutor Andrew Frisch told Bloomberg. "Cooperation is always a possibility for a defendant, but it's a question of whether he has information."
But, "if Martoma isn't willing to say that he told Cohen his recommendation was based on inside information, then the government is stuck," Peter Henning, a law professor at Wayne State University, told Bloomberg. "It's he-said-he-said."
According to court filings, Cohen went with Martoma's bullish inclination on the stocks because Martoma was "closest" to the drug trials. And he went along with Martoma's about-face after a 20-minute phone call in July 2008, after Martoma e-mailed the SAC chief, "Is there a good time to catch up with you this morning? It's important."
A day later, Cohen ordered the firm's head trader to sell off its stake in Elan.
SAC employed algorithms and dark pools "so as not to alert anyone else," the complaint alleges.
The trades were "executed quietly and effectively over a four-day period through algos and dark pools and booked into two firm accounts that have very limited viewing access," the trader wrote to Cohen. "The process clearly stopped leakage of info from either in or outside the firm and in my viewpoint clearly saved us some slippage."
Prosecutors have been looking at the so-called Cohen account at SAC, which includes SAC's best ideas, for more than a year. And while Martoma, the sixth current or former SAC employee to be charged in the government's recent insider-trading crackdown, is also the first directly linked to Cohen, others have been tied to him and his account less directly. Former traders Noah Freeman and Donald Longueuil, who pleaded guilty to insider-trading, suggested trades to Cohen, and Freeman told the FBI that it was understood at SAC "that providing Cohen with your best trading ideas involved providing Cohen with inside information."
More recently, SAC trader Jon Horvath pleaded guilty to insider-trading in a case involving Level Global Investors co-founder Anthony Chiasson, himself a former SAC trader. Horvath's boss, Michael Steinberg, is an unindicted co-conspirator in that case.
In addition, former SAC fund manager Richard Choo-Beng Lee pleaded guilty in the Galleon Group insider-trading case, and another, Joseph Skowron, pleaded guilty to insider-trading as chief healthcare fund manager at FrontPoint Partners. Another former SAC employee, ex-CR Intrinsic analyst Jonathan Hollander, settled SEC charges of insider-trading.
SAC was the subject of insider-trading investigations four year ago, two years ago and last year, as well as a Congressional inquiry last year. In addition, the likes of Cohen's ex-wife and Bernard Madoff have accused him of insider-trading, and in 2010, an extortionist rabbi was convicted of targeting SAC by claiming a congregant had evidence of the crime against the firm.