NEW YORK, Jan 6 (Reuters) - A trial starting this week over what prosecutors call the most lucrative insider trading scheme ever will likely delve into the trading activity of Steven A. Cohen, the founder of the SAC Capital Advisors hedge fund.
Mathew Martoma, 39, is charged with using confidential information provided by two doctors involved in a clinical trial in 2008 to trade in drug companies Elan Corp Plc and Wyeth, now owned by Pfizer Inc.
The trial is part of a crackdown on insider trading by federal prosecutors in New York. Since October 2009, 78 people have been convicted, either through plea deals or in an unbroken trial winning streak for prosecutors.
Much of the investigation has centered on improper trading activities at SAC Capital, where eight current or former employees, including Martoma, have been criminally charged.
In papers filed in court ahead of Martoma’s trial, prosecutors charge that in 2008 SAC began selling off a $700 million position in Elan and Wyeth - mostly held in Cohen’s own accounts - and placed bets against the companies after Martoma received tips from the doctors.
The hedge fund made profits and avoided losses amounting to $275 million, the prosecutors said.
Cohen has denied wrongdoing and has not been charged criminally.
Martoma, who was arrested at his home in Boca Raton, Florida, in November 2012, has pleaded not guilty and not cooperated with prosecutors.
“Mr. Martoma continues to fight these charges and is preparing for trial,” Richard Strassberg, a lawyer for Martoma at the firm of Goodwin Procter, said in an email.
Jury selection begins on Tuesday and the trial is expected to run three to four weeks.
The trial will come less than a month after a jury in the same courthouse in New York convicted another SAC portfolio manager, Michael Steinberg, of also trading on inside information.
Meanwhile, SAC Capital pleaded guilty in November to fraud charges stemming from insider trading by its employees and agreed to pay $1.2 billion in penalties.
SAC Capital has also entered into a $616 million accord with the U.S. Securities and Exchange Commission to resolve similar claims. The agency is separately seeking to bar Cohen from the financial industry for failing to supervise Martoma and Steinberg.
Once a $14 billion fund, SAC Capital is converting itself into a so-called “family office” to manage Cohen’s own money.
Key witnesses at the trial are expected to include the two doctors, Sidney Gilman and Joel Ross, who are cooperating with the government under non-prosecution agreements.
Gilman, a former neurology professor at the University of Michigan, chaired a safety monitoring committee for a clinical trial of the Alzheimer’s drug bapineuzumab being conducted by Elan and Wyeth.
Ross, 58, who founded Memory Enhancement Center in Eatontown, New Jersey, acted as a clinical investigator on the drug trial, a role he has played with other Alzheimer’s drugs.
During the period in question, Martoma, a portfolio manager at SAC Capital’s CR Intrinsic Investors, held some 42 consultations with Gilman through an expert networking firm, Gerson Lehrman Group, according to prosecutors.
Gilman, 81, earned nearly $108,000 speaking to SAC employees, including Martoma, the SEC said in a parallel lawsuit. Gilman has agreed to pay $234,000 to settle that case.
Paid consultations with Ross, meanwhile, came via a firm called HCRC, according to his lawyer, Alexander Novak.
Based on confidential information from the drug trial, Martoma began buying shares of Elan and Wyeth and recommended Cohen do the same, according to prosecutors.
On July 17, 2008, Gilman told Martoma the final results of the clinical trial, 12 days before they were to be announced publicly. They met in Ann Arbor, Michigan two days later, on a Saturday, to further discuss the trial, according to the indictment.
The following Monday, after a call between Martoma and Cohen, SAC began selling off its $700 million position in Elan and Wyeth, prosecutors have said. A spokesman for SAC Capital declined to comment.
When the trial results were made public, SAC made profits and avoided losses of $276 million, according to prosecutors. Martoma subsequently earned a $9.3 million bonus.
Martoma’s lawyers have indicated that at the trial they will seek to question the doctors’ credibility. In meetings with investigators, both doctors at first denied passing inside information to Martoma, but later agreed to cooperate, Martoma’s lawyers said in a pre-trial motion.
Novak, Ross’s lawyer, said in an email that when defendants attack witnesses’ credibility, “that is all they have ... because the law and the facts are against them.” He said he insisted his client get complete immunity before talking to the government, and said Ross never traded in the stocks.
Marc Mukasey, a lawyer for Gilman, confirmed his client would testify pursuant to his agreement but had no further comment.
While Cohen figures heavily in the case, he is not expected to testify because of an ongoing broader probe into insider trading by prosecutors.
As a result, Martoma’s lawyers have sought to introduce as evidence transcripts of a deposition by Cohen in May 2012 with the SEC.
In the deposition, Cohen told investigators he decided to sell Wyeth securities after talking to Wayne Holman, a former SAC trader who went on to establish his own hedge fund, Ridgeback Capital Management. A lawyer for Holman did not respond to a request for comment.
Cohen said he considered Holman “a great healthcare investor” and had agreed to pay him $20 million per year to act as a consultant for investment recommendations. Holman said he was selling his Wyeth shares the same week that SAC Capital sold its stock, Cohen said.
U.S. District Judge Paul Gardephe was set to rule as early as Monday on whether to allow that testimony.
The case is U.S. v. Martoma, U.S. District Court, Southern District of New York, 12-cr-00973. (Additional reporting by Emily Flitter; Editing by Eddie Evans and Jeffrey Benkoe)