Report Casts Doubt On Case Against Cohen

Feb 4 2013 | 4:25pm ET

The "most lucrative" insider-trading scheme in history may not have been as rich as prosecutors have suggested.

Former SAC Capital Advisors portfolio manager Mathew Martoma stands accused of earning the hedge fund some $276 million in illicit profits—both gains and losses avoided—trading on confidential information about Alzheimer's drug trials. But in all of their public pronouncements, the Justice Department has not mentioned that SAC did suffer a loss on the trade through an equity swap previously disclosed only in court documents, The New York Times reports.

That swap, giving SAC long exposure to 12 million shares of Wyeth LLC, combined with stock sales and short positions prosecutors say Martoma pushed based on confidential information he received from a doctor overseeing the trials, left with neutral exposure to the combination of Wyeth and Elan Corp. shares. And when the negative results were made positive, SAC's $70 million paper loss on the Wyeth swap all-but negated its $83 million in gains on the shorts.

Prosecutors have said that SAC sold its Wyeth and Elan positions, which they say Martoma had built up based on positive reports from his source, after the source, who is cooperating with authorities, warned of negative results, thereby saving SAC $194 million in losses. But, according to the Times, SAC is likely to argue that quickly exiting large positions is nothing new for the firm, and that the market chatter surrounding the drug tests was anything but uniformly positive in the days leading up to the negative report in July 2008. SAC and Martoma could point to that as a reason for moving to neutral exposure on the stocks.

Prosecutors could argue that SAC had to leave the swap in place or risk attracting attention, the Times reports.

Either way, the possible strategy for SAC and Martoma's refusal thus far to cooperate could put the government's hopes of charging SAC Capital Advisors chief Steve Cohen in jeopardy. Prosecutors face a July statute-of-limitations deadline to file charges against Cohen, unless they reach a tolling agreement with him or can prove an ongoing conspiracy with Martoma. SAC has denied any wrongdoing on either its part or Cohen's, and has told clients, who have a Feb. 15 deadline to submit redemption requests, that it is confident that Cohen will not be charged and that it will likely face only a large fine.

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