Prosecutor exposes phone chat with SAC Capital founder as insider trading trial starts in NY

NEW YORK, N.Y. – A former SAC Capital Advisors portfolio manager got inside information about an Alzheimer’s drug trial and made a pivotal phone call to his billionaire boss a day before the hedge fund began dumping more than $700 million in pharmaceutical stocks, a prosecutor told a jury Friday in opening statements at the trader’s criminal trial.

Mathew Martoma seemed eager to speak with SAC Capital founder Steven A. Cohen on July 20, 2008, after returning from a roundtrip flight to Michigan a day earlier, when he learned secrets about the results of a drug trial designed to test the safety and effectiveness of an Alzheimer’s drug being touted as a breakthrough, Assistant U.S. Attorney Arlo Devlin-Brown said.

He said Martoma, of Boca Raton, Fla., sent Cohen an email at 8:52 a.m., asking: “Is there a good time to catch up with you this morning? It’s important.”

Devlin-Brown said prosecutors will show jurors the email and phone records to prove that Martoma and Cohen spoke by phone for 20 minutes beginning at 9:42 a.m. that day.

Over the next eight days, the Stamford, Conn.-based SAC Capital sold all of its more than $700 million investment in drug makers Elan Corp. and Wyeth, which were jointly developing the drug undergoing the three-year drug trial. The announcement of the results of the drug trial involving 250 Alzheimer’s patients caused the stock of Elan to plummet more than 40 per cent while Wyeth’s fell 11 per cent.

Devlin-Brown said Martoma pocketed $9.3 million in bonuses for the successful trades at SAC Capital, which pleaded guilty in November to fraud charges and agreed to pay $1.8 billion to settle charges that it allowed, if not encouraged, insider trading for more than a decade.

The prosecutor said Martoma, 39, gained an illegal advantage shortly after he started at SAC Capital in the summer of 2006, when he solicited interviews with 22 doctors working on the drug trial. He said two doctors agreed to meet, including Dr. Sidney Gilman, who served as chairman of the safety committee overseeing the clinical trial.

Devlin-Brown said the doctors “broke the law and disgraced themselves” and would testify for the government that they shared inside information with Martoma.

“The case is not about scientific testing and trading,” he said. “The case is about cheating.”

Cohen has not been criminally charged, but the Securities and Exchange Commission has accused him in a civil action of failing to prevent insider trading at the company, which he founded in 1992 and bears his initials. Cohen has disputed the allegations.

In Martoma’s defence, attorney Richard Strassberg attacked the case and the key witness, Gilman, and said prosecutors had “charged an innocent man.”

He said there were no wiretaps or taped conversations at all and no emails or other written communications in which anyone claims to be doing something illegally.

Strassberg said the sale of SAC Capital’s position in the pharmaceutical companies made perfect sense to secure a winning investment as the economy was collapsing and because public information available about the drug trial and the value of the companies showed the stock had risen too high and that disappointment on Wall Street was likely regardless of the Alzheimer test’s results.

Strassberg said if his client truly had inside information on the test results, he would have been buying rather than selling because doctors agreed that the drug trial was successful.

He called his client a “quintessential American success story” who was born to immigrants in Florida and excelled in school before working at a Boston-based hedge fund until SAC Capital recruited him in 2006.

“The prosecution has it wrong here,” he said. “They have rushed to judgment.”

The lawyer was particularly critical of the 81-year-old Gilman, who in 2008 was a professor of neurology at the University of Michigan Medical School.

He said the doctor has changed his story repeatedly, especially after prosecutors offered him a deal in which he would not be prosecuted if he testified against Martoma. He also said Gilman had made $1 million with a consulting business in which he spoke to 230 separate analysts, including 320 consultations.

And he said Gilman’s memory was flawed because he was undergoing chemotherapy for successful cancer treatments in 2008 when he met with Martoma.

“Dr. Gilman’s story at its heart makes no sense,” Strassberg said.