U.S. Attorney Preet Bharara Clings to Hope of Catch the "Big Fish," Steven A. Cohen and his hedge fund, SAC Capital.

[ by Howard Haykin ]

Calling it "the most lucrative insider trading scheme ever charged,"  Federal prosecutors filed criminal charges in federal court in the Southern District of New York.   Having "caught a whopper" it's now up to U.S. Attorney Preet Bharara and his team to "try and reel him in"  with a conviction.  

Mathew Martoma, a former trader at CR Intrinsic, a division of SAC Capital, was charged with making about $276 million in combined profits and avoided losses by obtaining confidential information about a drug trial for an Alzheimer's drug developed by the pharmaceutical companies Elan and Wyeth.

Once again, federal prosecutors are perched at the doorstep of billionaire hedge investor Steven A. Cohen and his hedge fund, SAC Capital, shining the spotlight on insider trading crimes allegedly committed by former employees.

Prosecutors' Findings and Allegations.   According to the complaint, between 2006 and 2008, Mathew Martoma consulted with Sidney Gilman - a neurology professor at the University of Michigan, and a leading expert in Alzheimer's disease - on dozens of occasions about the preliminary results of the drug trial.  Once in possession of the insider information from Mr. Gilman, Mr. Martoma allegedly went and acquired some $700 million worth of common shares in pharma companies, Wyeth and Elan.  

It's understood that Mr. Gilman connected with Mr. Martoma through an expert network firm based in New York.  Expert networks became popular on Wall Street in the last decade, linking Wall Street money managers to specialists in various industries to help give them an edge on their investments. Expert networks have been a focus of the government's widespread crackdown on insider trading at hedge funds.

In June 2008, the complaint says, Mr. Martoma received secret information about negative data relating to the drug trials.  After receiving that information, Mr. Martoma caused SAC Capital to sell its entire inventory of about 10.5mn shares in Elan and about 7mn shares of Wyeth before the data was released to the public.

The day after the study was announced, Elan's share price dropped 42%, while Wyeth's share price fell 12%.  Mr. Martoma left SAC Capital in 2010, according to a spokesman at the hedge fund.  Yet, prior to his leaving, he had made profits or avoided losses totaling around $276 million.

Mr. Gilman is cooperating with the government and has entered into a non-prosecution agreement with the U.S. attorney's office in Manhattan.  A lawyer for Mr. Martoma could not be reached immediately for comment.

SEC's Parallel Civil Complaint.   According to an SEC complaint filed Monday against both Mr. Gilman and Mr. Martoma, Mr. Gilman earned more than $100,000 from his consulting work at the expert network firm. earned Mr. Gilman more than $100,000.

U.S. Attorney Preet Bharara Issued This Statement.   "The charges unsealed today describe cheating coming and going - specifically, insider trading first on the long side, and then on the short side, on a scale that has no historical precedent. As alleged, by cultivating and corrupting a doctor with access to secret drug data, Mathew Martoma and his hedge fund benefited from what might be the most lucrative inside tip of all time."

Mr. Martoma thus becomes the latest person to have worked at SAC Capital and be ensnared in an insider trading investigation.  Predecessors include:

• Jon Horvath, a former technology industry analyst at SAC, who pleaded guilty in September to participating in a conspiracy that illegally traded in the shares of Dell computer.
• Michael Steinberg, Horvath's boss and a former portfolio manager, has been named as an unindicted co-conspirator but has not been charged in the case. Mr. Steinberg's lawyer, Barry Berke, declined to comment.
• Donald Longueuil and Noah Freeman, 2 former SAC portfolio managers last year admitted to trading on illegal tips about publicly traded technology companies.  Mr. Longueuil is serving a 2-1/2 year sentence at a federal prison in Otisville, NY.  Mr. Freeman currently is cooperating with prosecutors and has yet to be sentenced.

For further details, go to [Dealbook, 11/20/12].