The US Securities and Exchange Commission (SEC) announced that it had charged CR Intrinsic Investors LLC (a hedge fund advisory firm), Mathew Martoma (its former portfolio manager) and Dr Sidney Gilman, a medical consultant for an expert network firm, in relation to their role in an insider trading scheme. Dr Gilman has agreed to settle the SEC’s charges and cooperate in this and related SEC investigations. The U.S. Attorney’s Office for the Southern District of New York also announced criminal charges against Martoma and a non-prosecution agreement with Dr Gilman, acknowledging the assistance of the SEC and the FBI.
Dr Gilman was the chairman of the safety monitoring committee responsible for overseeing the clinical trial of an Alzheimer’s drug being jointly developed by pharmaceutical companies Elan Corporation plc and Wyeth, and was the person eventually selected to present the final results of the trial to the public.
Although Martoma and Dr Gilman took some basic steps to conceal the topic of their conversations from the expert network, the conduct appears to have been pretty blatant and there seems to have been little sophistication in terms of cover-up. The SEC alleges that Martoma obtained confidential details about the trial through phone calls with and emails from Dr Gilman, which were arranged by a New York-based expert network firm for which he worked as a medical consultant. Dr Gilman provided documents he had received from Elan in encrypted form, also supplying the password to allow Martoma to access the material, and even kept incriminating references in his electronic calendar.
The scheme resulted in several hedge funds selling Elan and Wyeth securities worth more than $960 million in just over a week, not only liquidating their position but taking on substantial short positions, a massive repositioning which led CR Intrinsic and the affiliated advisory firm to make some $82 million in profits and $194 million in avoided losses.
Much of the $9.3 million bonus Martoma received at the end of 2008 was attributable to the illegal profits that the hedge funds managed by CR Intrinsic and the other investment advisory firm had generated. Dr Gilman received around $108,000 for his consultations with Martoma and others at the hedge fund advisory firms, and some $79,000 from Elan for consultations relating to the clinical trial in 2007 and 2008.
Dr. Gilman has agreed to a permanent injunction against further violations of federal securities laws and to pay in excess 234,000 in disgorgement and prejudgment interest. The proposed settlement is subject to approval by the court, which also will determine at a later date whether any additional financial penalty is appropriate. The SEC’s investigation is continuing.