[ by Howard Haykin ]

Steven A. Cohen's links to Mathew Martoma and criminal charges filed against the former SAC trader loom increasingly larger with each passing day.  On Tuesday, federal prosecutors filed insider trading charges against Mr. Martoma, in a case U.S. Attorney Preet Bharara views as the most lucrative insider trading scheme.

With a trial date light-years away, federal prosecutors are playing up the idea that, for the first time ever, evidence suggests Mr. Cohen participated in trades based on illegal insider information.  It's not noted whether SAC Capital founder, Steven A. Cohen, himself knew the information was confidential, and he hasn't been charged.  Yet, the strong perception is that the feds are trying to get at Cohen through Martoma - i.e., they're using the "small fish as bait to catch the big fish."  Prepare the skillet. 

Ongoing Pursuit of Steven A. Cohen.   Federal prosecutors have been pursuing the billionaire hedge fund manager for years.  The Martoma case is the 6th against a SAC employee.  In fact, things got so heated that, in 2010, Cohen gave a rare interview to Vanity Fair, where he said he wanted to combat persistent rumors that his firm, SAC Capital Advisors, routinely violated securities laws by trading on confidential information.  "In some respects I feel like Don Quixote fighting windmills," Mr. Cohen said at the time.  "There's a perception, and I'm trying to fight that perception."  To catch Mr. Cohen - "hook, line and sinker," the prosecution most likely would need the cooperation of Mathew Martoma.  

It is no secret that the government has been circling Mr. Cohen since the middle of last decade, when it began its crackdown on insider trading, an investigation that has resulted in more than 70 criminal charges. Prosecutors have already linked five former SAC employees to insider trading while at the fund - securing three convictions - though none of those cases connected Mr. Cohen to any illicit activity. But the complaint filed on Tuesday puts Mr. Cohen at the center of the supposed improper conduct.

Tuesday's Arrest of Martoma and Possible LInk to Cohen.   FBI agents arrested Mr. Martoma, 38, early Tuesday morning at his home in Boca Raton, Fla., an opulent Mediterranean-style mansion located at the elite Royal Palm Yacht and Country Club. He is expected to make an appearance in Federal District Court in Manhattan Monday morning.

Cohen, 56, is a legend on Wall Street, sitting atop a multibillion-dollar fortune.  He built up his fortune by posting phenomenal investment returns - averaging ~ 30% over the last 2 decades.  Cohen has taken his initial $25 million investment pot to the point where SAC now manages about $13 billion and employs 900 employees throughout the world.  Mr. Cohen has used his wealth to emerge as a major force in the art world, owning an eclectic collection that includes works by Picasso, Warhol, and Cézanne.  "SAC's extraordinary profits have always been something of a market mystery," said Sebastian Mallaby, the author of "More Money Than God," a book on the history of hedge funds. "As more and more lawsuits implicate former SAC traders, we may at last understand where SAC's profits came from."

Whether prosecutors can establish culpability on the part of Steven A. Cohen is largely based on what Mr. Martoma told Mr. Cohen that led SAC to quickly dump $700 million worth of stock.

• Did he provide his boss details on why he had turned sour on Wyeth and Elan?
• Did he specifically share the insider information about the drug trial's negative results and identify the source of the secret information? Through a spokesman, he said he was confident he had acted appropriately.

At present, Mr. Martoma will fight the charges and has hired Charles Stillman, a heavyweight defense lawyer.  It's always possible Mr. Martoma can reverse course and agree to cooperate with federal prosecutors. Perhaps the government's best weapon for persuading Martoma to do just that is its threat of stiff sentencing guidelines for insider trading.  Under the federal sentencing guidelines, Martoma could receive more than 15 years in prison, a term that could be reduced - or avoided altogether - if he agreed to testify against Mr. Cohen. 

"This has all the markings of a case where the government goes after the smaller fish and then pressures them to flip so they can get the whale," said Bradley D. Simon, a criminal defense lawyer and former federal prosecutor in New York.

For further details, go to:   [Dealbook, 11/22/12].