U.S. Government Raises Pressure On SAC PM

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Last week, US prosecutors raised the pressure on a former SAC portfolio manager, Matthew Martoma, by expanding their $276 mln insider trading case against him, saying that he obtained inside information from at least a second doctor.


Restatement of Charges

Initially U.S. prosecutors charged that Matthew Martoma, obtained inside information from University of Michigan neurologist Sidney Gilman, who oversaw a clinical trial for an Alzheimer’s drug jointly developed by Elan and Wyeth.  Dr. Gilman is accused of providing Martoma with the trial results, violating his duty to the drug companies not to divulge confidential information. Martoma purportedly had 42 consultations with Dr. Gilman, paying him $108,000 for his work.

The government has now modified its charges against Martoma, saying that he actively sought out inside information from a number of doctors involved in the clinical trial for the Alzheimer’s drug.  According to court documents, Martoma emailed an unnamed expert network a list of 20 doctors who were participating in the drug trial and asked for them to set up consultations with each of them.  Apparently nine doctors who responded to the expert network’s query, all had declined to speak with Martoma, citing a “conflict of interest.”

However, at least one additional doctor agreed to consult with Martoma.  In the court filing, the second doctor, described as “a co-conspirator,” met with Martoma for paid consultations arranged by the expert network where he provided inside information regarding the drug trial “with the expectation that Martoma would assist (the doctor) in obtaining additional clinical trial business.”


Unwanted Scrutiny for Expert Networks

Gerson Lehrman Group (GLG), was identified as the expert network that put Dr. Gilman together with Martoma.  It has also been reported that Dr. Gilman breached his written agreement with GLG not to divulge confidential information to any client, and both Gilman and Martoma lied about the topics of a number of their consultations together in order to get around GLG’s rigorous compliance rules.

However, according to the new charges the expert network Martoma used to set up consultations with the 20 doctors he personally sourced has been identified only as “a financial services firm that provided expert networking services to the SAC hedge fund.”

Despite the fact that the Martoma case is old news, the new revelation that Martoma used an unnamed expert network to proactively set up calls with other doctors involved in the Alzheimer’s drug clinical trial might spook asset managers from using these services.

The reason for this kind of response is because news like this often prompts investors to question their hedge funds’ use of services like expert networks and other independent research firms.  In fact, we have spoken with a handful of asset managers recently who have chosen to halt (at least temporarily) their use of expert networks due to these customer concerns.


Summary

Clearly US prosecutors are increasing the pressure on Matthew Martoma by expanding the case against him, hoping that he will change his mind and become a cooperating witness for the government in their ongoing efforts to convict SAC Capital’s founder, Steven A. Cohen, personally of insider trading.

But even if Martoma stands firm, US attorney Preet Bharara has developed an alternative strategy to punish Cohen by bringing criminal charges against SAC Capital, a rare prosecution of a corporate entity.  This charge follows the SEC’s civil action where they are accusing Cohen of failing to adequately supervise his employees, including Mr. Martoma.

Unfortunately, a number of bystanders including expert networks and other independent research firms are likely to be negatively impacted by the ongoing battle between the US government and hedge fund SAC Capital.  We can only hope this impact will be short lived.

 

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