[ by Larry Goldfarb ]

The insider trading case against Mathew Martoma, a former health-care portfolio manager at a unit of SAC Capital Advisors LP seems to be very straight forward.  Martoma received information on the status of a clinical trial of an Alzheimer drug from a doctor involved, Sidney Gilman, who was close to the trials of the experimental Alzheimer drug, since 2007.  Gilman has entered into a non-prosecution agreement with the U.S. government, according to his lawyer, Marc Mukasey. He is cooperating with the SEC and the U.S. Attorney’s office, the lawyer said.

Assuming Gilman “can deliver the information,” Martoma will probably serve some jail time. There have been a number of convictions for insider trading of portfolio managers at SAC.  For instance, former SAC Capital portfolio managers, Donald Longueuil and Noah Freeman, last year pleaded guilty to securities and wire fraud for insider trading.  Longueuil is currently serving a 30-month prison term, while Freeman has been cooperating with the government’s investigation.   Yet the prosecution has not ensnared SAC’s owner, Steven Cohen; he with a reported net worth of just under $10 Billion.  Part of the problem is the how SAC is organized.  SAC hires portfolios managers, seeds them with capital and allows them to trade independently.  The firm makes it a point that the managers should not exchange information with each other or with SAC.  The firm employs about 50 legal and compliance staff to maintain decorum. 

What makes this case so intriguing is that Cohen did speak with Martoma on a number of occasions and bought and then sold shares on the drug companies running the trials at Maratoma’s urging.  The question prosecutors would like to know is whither Cohen knew about the experience of Gilman and the resulting inside information. “Mr. Cohen and SAC are confident that they have acted appropriately and will continue to cooperate with the government’s inquiry,” Jonathan Gasthalter, a spokesman for SAC Capital, said in an e-mailed statement.

“If Martoma isn’t willing to say that he told Cohen his recommendation was based on inside information, then the government is stuck,” Peter Henning, a professor at Wayne State University Law School in Detroit, said in a phone interview. Even if Martoma did divulge that information, it’s a circumstantial case. “It’s he said-he said,” Henning said.

For more information, please read [Bloomberg, 11/20/12].