Manhattan U.S. Attorney and FBI Special Agent in Charge Announce Charges Against Former Hedge Fund Portfolio Manager for $276 Million Insider Trading Scheme Involving Alzheimer’s Disease Drug Trial
Most Lucrative Insider Trading Scheme Ever Charged
|U.S. Attorney’s Office November 20, 2012|
Preet Bharara, the United States Attorney for the Southern District of New York, and April Brooks, the Special Agent in Charge of the Criminal Division of the New York Office of the Federal Bureau of Investigation (FBI), announced today the unsealing of insider trading charges against Mathew Martoma, a former portfolio manager for a division of a group of affiliated hedge funds (the hedge fund). Martoma allegedly used material, non-public information (“inside information”) that he received from a doctor who served as an adviser to Elan Corporation PLC (“Elan”) on the clinical trial of an Alzheimer’s Disease drug to make profits and avoid losses for the hedge fund in an amount totaling approximately $276 million. Martoma was arrested at his home in Boca Raton, Florida, and made an initial appearance in federal court in West Palm Beach, Florida. He will appear in Manhattan federal court on Monday, November 26, 2012, at 10:00 a.m.
Manhattan U.S. Attorney Preet Bharara said, “Today, yet another privileged hedge fund professional stands accused of insider trading. The charges unsealed today describe cheating coming and going—specifically, insider trading first on the long side, and then on the short side, on a scale that has no historical precedent. As alleged, by cultivating and corrupting a doctor with access to secret drug data, Mathew Martoma and his hedge fund benefited from what might be the most lucrative inside tip of all time. As Martoma allegedly got sneak peeks at drug data, he first recommended that the hedge fund build up a massive position in Elan and Wyeth stock and then caused the fund to shed those shares after getting a secret look at the unexpectedly bad results of a clinical drug trial. And so, overnight, Martoma went from bull to bear. As a result of the blatant corruption of both the drug research and securities markets alleged, the hedge fund made profits and avoided losses of a staggering $276 million, and Martoma himself walked away with a $9 million bonus for his efforts. The SEC and FBI deserve particular praise for uncovering the facts leading to today’s charges.”
FBI Special Agent in Charge April Brooks stated, “Today’s arrest is the latest in the FBI’s five-year campaign to root out insider trading at hedge funds and expert networking firms, which has resulted in more than 70 arrests to date. What we see again is an unholy alliance between an insider willing to divulge valuable non-public information and a money manager to whom that information is as good as gold. The recurring theme through all of the contact between the insider and Martoma was their knowledge that what they were doing was wrong, prohibited by their respective employers’ policies, and illegal. They engaged in continual subterfuge to disguise or conceal their communications. A competitive advantage gained through superior research and analysis is one thing. Cheating is another matter altogether. If the information isn’t public, you can’t trade on it. We will continue to bring these cases so long as people fail to act accordingly.”
According to the allegations in the three-count criminal complaint unsealed today in Manhattan federal court:
During the period of the insider trading scheme, Martoma was a portfolio manager of the hedge fund and was responsible for investment decisions in public companies in the health care sector, including those at issue here, the drug companies Elan and Wyeth, that were involved in the development of experimental drugs to combat Alzheimer’s Disease. At the time, scientists and investors alike were awaiting the results of a clinical trial being conducted by Elan and Wyeth of a drug called bapineuzumab, which offered a novel but untested approach to the treatment of Alzheimer’s Disease (the “drug trial”).
In order to obtain inside information about the drug trial, Martoma arranged for approximately 42 paid consultations between 2006 and July 2008 with a leading Alzheimer’s Disease doctor (the doctor) who chaired the Safety Monitoring Committee (SMC) for the drug trial and who engaged in paid consultations with financial industry clients through an expert networking firm. Through an exploitation of Martoma’s personal and financial relationship through the expert networking firm with the doctor, Martoma used these consultations to obtain inside information about the drug trial that the doctor learned at the SMC meetings and through other communications with Elan and Wyeth. The doctor is now a cooperating witness (the “CW”) for the government and has entered into a non-prosecution agreement.
A number of the consultations were scheduled to take place soon after scheduled SMC meetings at which representatives from Elan and Wyeth reported on the status of the bapineuzumab drug trial and other developments. Because the expert networking firm had explicit rules prohibiting consultants from sharing inside information with clients, and because Martoma was required to inform the Expert Network of the purpose of his proposed consultations, Martoma and the CW would disguise the agenda for their conversations. In one case, for example, they claimed they would be talking about multiple sclerosis treatments and in another, Parkinson’s Disease, concealing that, in fact, they were discussing the drug trial.
The inside information Martoma initially received from the doctor consisted of generally positive safety data about which the doctor was aware through his chairmanship of the SMC. As a result, Martoma increased the holdings of Elan and Wyeth, and further recommended that the owner of the hedge fund (the “hedge fund owner”) increase the hedge fund’s position in Elan and Wyeth, which the hedge fund owner did. By June 30, 2008, the hedge fund held approximately $700 million worth of Elan and Wyeth equity securities.
In late June 2008, the CW was asked to present the detailed results of phase II of the drug trial at the International Conference on Alzheimer Disease (the “ICAD presentation”) on July 29, 2008. Until that time, he had only been privy to the safety results of the drug trial. In preparation for the ICAD presentation, the CW was made aware—for the first time—of the efficacy results scheduled for July 15, 2008, and they were negative, particularly in comparison with market expectations. The results raised serious questions about how well the drug worked and, in fact, whether it worked at all.
On July 17, 2008, the CW shared the negative results in a call with Martoma and also provided him with a draft power point presentation that had been created for the ICAD meeting and that was marked “Confidential, Do Not Distribute.”
Three days later, on July 20, 2008, Martoma sent the hedge fund owner an e-mail in which he wrote that “...It’s important [that we speak],” which they did, for approximately 20 minutes. The hedge fund owner then directed the hedge fund to sell Elan and Wyeth securities prior to the ICAD presentation. Over the next seven days, the hedge fund liquidated its entire position in Elan and almost all of its position in Wyeth—a total of 17.7 million shares worth approximately $700 million. The hedge fund also shorted Elan and Wyeth by approximately 7.75 million shares. This trading represented over 20 percent of the reported U.S. trading volume in Elan and 11 percent of the volume in Wyeth.
The day after the ICAD presentation, Elan stock closed approximately 42 percent lower and Wyeth shares fell approximately 12 percent.
Through this trading activity, the hedge fund is alleged to have earned profits and avoided losses of approximately $276 million.
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Martoma, 38, is charged with one count of conspiracy to commit securities fraud and two counts of securities fraud. He faces a maximum penalty of five years in prison for the conspiracy charge and 20 years in prison on each of the two securities fraud charges. With respect to the conspiracy charges, he faces a maximum fine of $250,000 or twice the gross gain or loss derived from the crimes, and for the securities fraud charges, he faces a maximum fine of $5 million or twice the gross gain or loss derived from the crime on each charge.
Mr. Bharara praised the efforts of the FBI and also thanked the SEC for its assistance in the investigation. He added that the investigation is continuing.
This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which Mr. Bharara serves as a Co-Chair of the Securities and Commodities Fraud Working Group. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch and, with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorney Arlo Devlin-Brown is in charge of the prosecution.
The charges contained in the complaint are merely accusations, and the defendant is presumed innocent unless and until proven guilty.