Matthew Martoma’s Trial Another Blow For Steve Cohen…

3 mins. to read

It seems that the easiest way for hedge funds to achieve the the much-desired alpha is not through thorough research but rather through clever networking with the right people where valuable information can be extracted and then used as input for asset trading. Whether this is “mosaic theory” via “expert networks” or just plain old insider trading is open to interpretation…

Enter one Mr Timothy Jandovitz, a former employee of SAC Capital, who was deeply concerned when he heard about the imminent bad news on the clinical trials being carried out regarding the Alzheimer’s drugs that were being developed by both Wyeth and Elan back in 2008. With a position worth several hundred millions, Jandovitz was staring down a major potential loss, in fact north of $100 million for SAC and with it the very near certainly of his job.

But, while Jandovitz had not done his homework, both Mathew Martoma, Jandovitz’s Portfolio Manager and SAC’s CEO Steve Cohen had already acted to avoid the worst and sold every share they had on both Wyeth and Elan. Not only that, but it seems that they got themselves illuminated about the changing prospects for those companies and in fact swng from a long position to a short one. In the process, both Martoma and Jandovitz jobs were saved and SAC actually locked in a $276 million in profits as opposed to a thumping loss. Lucky trading eh?

That kind of luck of course hardly comes from pure research and networking… at least that’s what the US Government now thinks and it seems very likely that Martoma will face severe charges of fraud and insider trading, risking as much as 20 years in jail. A long time to count his allegedly ill gotten gains!

During the last few years, several US hedge fund managers and senior employees have been accused of illegal conduct by the Feds as the government attempts a crackdown on illegal insider trading and, to many observers, tries to tighten the rope around Mr Steve Cohen – their ultimate goal. SAC’s employees nurture a network of connections where they meet with experts in several fields, but the ability to perfectly time their trades has raised suspicion on the legality of such networks. Martoma is said to have met with a doctor named Sidney Gilman, a Michigan-based neurologist who is involved in Alzheimer’s drug trials, over 40 times between 2006 and 2008, paying him just $70,000. Unless Martoma had a serious neurological problem, it will be hard to justify any other explanation for these meetings other than to extract information about Wyeth and Elan drug trials.

The prosecution has been trying for some time to obtain an edge over Martoma’s defence by digging further into his past. They have now found evidence on an actual fraud that Martoma committed while at the Harvard Law School. He allegedly forged a Harvard transcript, falsified an email, and created a dummy forensic computing company to cover his trail. There is also no record of him graduating for the revered business school. Nevertheless years later he actually did complete an MBA at Stanford.

Thus far the Feds have not managed to snare their main target – Steve Cohen. SAC Capital has however faced administrative sanctions by the U.S. Securities and Exchange Commission in November when it agreed to pay a record $1.8 billion in criminal civil settlements and to close its doors to outside investors but, as yet, the charges on Cohen don’t go any deeper than of failure to supervising employees.

Last month however Michael Steinberg, one of SAC’s senior employees pleaded guilty of fraud and conspiracy for trading using confidential information. Over the last four years the SEC has secured 77 guilty pleas or convictions, out of 87 people charged. The odds aren’t good for Mathew Martoma even if “Stevie” remains charge free and at liberty…

Filipe R Costa

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