Just when it appeared that the expert network insider trading investigations had come to an end with convictions and guilty pleas, the Manhattan U.S. Attorney’s Office and the SEC announced the filing of what may be the most lucrative of insider trading cases with profits made and losses avoided totaled $276 million. The criminal case named as a defendant portfolio manager Mathew Martoma, while the civil action added his former employer, CR Intrinsic Investors, LLC and Dr. Sidney Gilman as defendants. U.S. v. Martoma, 12 mag 2985 (S.D.N.Y. Unsealed Nov. 20, 2012); SEC v. CR Intrinsic Investors, LLC, Civil Action No. 12 cv 8466 (S.D.N.Y. Filed Nov. 20, 2012).
CR Investors is a Stamford, Connecticut based unregistered investment adviser affiliated with unidentified Investment Adviser A. Mr. Martoma served as portfolio manager until 2010. He met Dr. Gilman through a New York expert network firm. At the time the doctor, a professor of neurology at the University of Michigan Medical School, had a consulting contract with Elan Corporation, plc. He consulted on certain clinical trials being conducted by Elan and Wyeth. Specifically, from 2006 through 2008 the two companies were conducting clinical trials for the Alzheimer’s drug, bapineuzumab.
Beginning as early as 2007 Dr. Gilman is alleged to have furnished Mr. Martoma with inside information on the Phase II trial for the drug. The portfolio manager secured power point presentations with detailed information about the drug and the trials from Dr. Gilman. The Doctor also provided telephone briefings and updates.
On June 17, 2008 the top line results for the Phase II trial were released. The share price rose. Subsequently, Dr. Gilman was selected to present the Phase II Trial results at the International Conference on Alzheimer’s Disease, scheduled for July 29, 2008. The Doctor then sent Mr. Montoma an e-mail requesting an expert network conversation.
The Doctor also traveled to Elan’s offices on July 15 and 16, 2008 to review the full results of the Phase II Trial. In the period prior to the July 29 announcement the trader and the doctor spoke several times on the phone. During the conversations, according to the court papers, Mr. Martoma was given the then confidential results of the trials. He was also furnished a copy of a power point presentation with detailed information. At the time funds managed by Mr. Martoma and related funds at an affiliated entity held a combined long position of over $700 million in Elan and Wyth securities. As a result of the inside information the long positions were liquidated. The funds immediately built a substantial short position in each security.
Following the announcement of disappointing results, the funds had profits of about $82 million on the short positions. By liquidating their massive long positions the funds avoided losses of about $194 million. Overall the trading profits and losses avoided totaled over $276 million.
Mr. Martoma received a $9.3 million bonus at the end of 2008, a significant portion of which was attributable to the illegal trading profits. Dr. Gilman was paid over $100,000 by the expert network and $79,000 under his consulting contract with Elan for work in 2007 and 2008.
In the criminal case Mr. Martoma has been charged with one count of conspiracy to commit securities fraud and two counts of securities fraud. Dr. Gilman entered into a non-prosecution agreement. The case against Mr. Martoma is pending.
The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Dr. Gilman settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. He also agreed to pay $234,000 in disgorgement and prejudgment interest. The court will determine at a later date if any additional financial penalty is appropriate. The action is pending as to the other two defendants.