Statement of SAC April Brooks on Arrest of Mathew Martoma
|FBI New York November 20, 2012|
Statement by April Brooks, New York SAC, Criminal Divison:
Earlier today, FBI agents arrested Mathew Martoma in Florida on insider trading charges. 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. To date, these investigations have resulted in charges against more than 70 people.
The investigation that brought today’s charges is not the first—and surely will not be the last—to benefit from our own form of insider information: As the criminal complaint reveals, much of the evidence against Mr. Martoma was provided to us by a co-conspirator who is now a cooperating witness.
The initiative undertaken by our office in 2007, in coordination with the U.S. Attorney’s Office and the SEC, has yielded other cases with similar profiles. What we see 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 cooperating witness was a doctor, an Alzheimer’s expert, and a consultant to a company developing an Alzheimer’s drug. He had unique access to information about the safety and efficacy of the drug.
Martoma was a portfolio manager specializing in health care stocks. Martoma and the owner of the hedge fund that employed him traded heavily and aggressively on the expert’s information.
Based on insider information in advance of a favorable announcement, Martoma and the hedge fund owner bought large volumes of stock in the two companies developing the Alzheimer’s drug, Elan and Wyeth.
By the end of June 2008, the fund owned nearly three-quarters-of-a-billion dollars in Elan and Wyeth stock.
Details of clinical tests of the drug were to be made public at a conference at the end of July. The insider, chosen by Elan to present the data at the conference, was provided an advance look at the data in mid-July.
The clinical trial results were negative. Almost as soon as the insider learned this, he surreptitiously passed it to Martoma. And Martoma and the hedge fund owner wasted no time in aggressively dumping Elan and Wyeth stock from the fund.
Between July 21 and July 28, 2008, the fund sold all of its 10.5 million shares of Elan, and all seven million of its shares of Wyeth. But the fund didn’t merely avoid losses. It greedily schemed to profit further by shorting Elan and Wyeth stock an additional 4.5 million and 3.25 million shares, respectively.
The dumping of the now-toxic stock—an abrupt about-face from the acquisitive hoarding that preceded it—was a floodtide that accounted for more than one-fifth of that week’s total trading volume in Elan and one-tenth of Wyeth volume.
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. They e-mailed to schedule a phone call to discuss MS when they both knew the call would be about the Alzheimer’s drug testing. They e-mailed to set up a call to discuss Parkinson’s to disguise the purpose of another call about the clinical trials.
On July 17, 2008, to prepare him for the conference, Elan sent the insider a document marked “Confidential, Do Not Distribute.” It contained a summary of the negative clinical trial results. The insider e-mailed the document to Martoma later that very day, with the password needed to access it.
The insider and his information brought Martoma nearly $10 million in compensation for 2008. But as another employee noted in recommending Martoma’s firing for poor results the following year, he was “a one-trick pony.”
Paying a fee to consult industry experts and trading on their knowledge are permissible—so long as the knowledge isn’t material, non-public information. A competitive advantage gained through superior research and analysis is one thing. Cheating is another matter altogether.
A level playing field doesn’t mean every player wins. It does mean every player has equal access to information. To extend the metaphor, every player plays by the same set of rules.
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.
I want to thank Preet Bharara and Assistant U.S. Attorney Arlo Devlin-Brown. Thanks also to Rob Khuzami and the SEC. And I want to commend FBI case agent Matthew Callahan and his supervisor, Paul Takla.