February 8, 2014

Yet another Indian-American impaled on Bharara's fork

The boss at the hedge funds, Stephen Cohen, it seems, has escaped a jail term for insider trading. Martoma is the eighth employee to be hauled up by the court for the crime, and prosecutor Preet Bharara's credit rating is swelling and swelling! SAC Capital, not Cohen, pleading guilty to fraud, exited the case paying $1.8 billion in criminal and civil settlements, although the founder boss is still the target of the investigators.
New Delhi: Mathew Martoma looked downcast but stone-faced, and his wife Rosemary was flowing and sniffing as they moved out of the court room of New York's Southern District hand in hand where a 12-member jury of seven women and five men convicted him of two counts of securities fraud and one count of conspiracy last week.

As portfolio manager of hedge funds firm SAC Capital, the Indian-American had accessed non-public information about the progress in the trials of an Alzheimer's drug being conducted by pharmaceutical companies Elan and Wyeth and used the data to buy up the two companies' stocks when trials were showing signs of success but the information was still not public, and offloading the securities when the drug failure news was spilled to him by one of the two doctors he had cultivated as his contacts.

Martoma helped SAC Capital mint money and later short those stocks avoiding losses of $276 millions before the market crashed, for a commission of $9 million, prosecutors said.

Coupled with the revelations in the course of the trial that he was expelled from Harvard Law School and that he changed his name to get admission in Stanford's Graduate Business School later from where he took his MBA, his stint at SAC Capital and the tribulations that followed bear a resemblance to the many Hollywood movies like the recently released 'The Wolf of Wall Street,' an American black comedy film directed by Martin Scorsese, based on Jordan Belfort's memoir.

The verdict was the eighth insider trading conviction of an employee at SAC Capital, which at its peak time managed $15 billion hedge funds. The firm has long been under probe by the FBI and the US Attorney in Manhattan, Preet Bharara.

For attorney Preet Bharara and his office, this verdict is yet another feather in their cap. All the insider-trading cases he has initiated, without exception, have invariably led to conviction. There are now 79 on the score board. To his credit is a track record of successful prosecution in high profile cases that also included Sri Lankan Raj Rajaratnam, Indian Rajat Gupta, Stephen Cohen's SAC Capital, Indian diplomat Devyani Khobragade.

New York's Southern District judge Paul Gardephe did not mention a date to pronounce the sentence. Martoma, 39, could face a maximum of 45 years in prison theoretically but much less in practice. The highest sentence ever handed for insider trading has not exceeded 12 years.

Why did he not name Cohen and escape jail

Martoma had reportedly declined to cooperate with the government in the case.

It is not known why Martoma did not avail himself of an opportunity offered by the Federal investigators by naming his boss and SAC Capital founder Cohen against whom the prosecution has so far failed to bring up criminal charges, and opt for a plea deal. Instead, he chose the path of fighting the Federal prosecutors. Cohen was, in fact, posted with the accessed secrerts by Martoma, going by the fact that they had a conversation following the spill.

SAC Capital had earlier agreed to pay $1.8 billion in criminal and civil settlements, pleading guilty to fraud charges of insider trading by its employees, but not Cohen. The charge against Cohen so far is only that he failed to properly supervise his employees. However, on this count, the Securities and Exchange Commission is likely to bar Cohen from doing any future financial services.

The charge against Martoma is that he fraudulently obtained details about the trials of an Alzheimer's drug by the companies Elan and Wyeth by managing a relationship with two of their doctors. When the drug test results initially appeared promising and the data was still confidential, he made SAC Capital procure the company shares in bulk, in 2007. Later on when one of the doctors spilled to him that the final drug trials were a negative, he offloaded the shares before the data was made public and subsequently the market crashed.

It was in mid-July 2008 the SAC began selling its $700 million position in Elan and Wyeth, and by month end the drug results were made public. He earned his SAC a huge profit in the acquisition and and saved the firm from heavy losses later. The doctor, Gilman, who dispensed the secret information about the progress of the drug trials eventually deposed against him before the jury, confessing that he spilled the secrets which were non-public information.

Cohen has denied involvement in any wrongdoing and the attorney did not succeeed in framing any criminal charge against him. At the most, action can be taken against him by the Securities and Exchange Commission on the allegation of inadequate supervision of the employees accused of wrong-doing.

The murky past: He was earlier known as Ajai Thomas

In September 1999, Martoma, who was then known as Ajai Mathew Mariamdani Thomas, was expelled from the Harvard Law School for changing his B's to A's in documents he sent elsewhere, but to no profit! He was accused of further forgery to cover up the original forgery, by indulging in a series of frauds. A chain of motiveless cheating, it transpired. Even when a committee voted to expel him, he resorted to playing more and more tricks, it has come to light.

A couple of years later, he managed to get admission in Stanford's Graduate Business School and took MBA after changing his name. He graduated from there in 2003. It is to be seen if Stanford university will rescind his degree as he suppressed his past when he sought admission.

The minute details of what happened at Harvard were narrated before the jury during Martoma's trial.

In November 2012, Martoma was charged and arrested from his home in Boca Raton, Florida, in what is described as "the most lucrative" insider trading scheme in history. He was freed on a $5 million bail. He was workiong at SAC subsidiary CR Intrinsic Investors.

Bharara, the attorney, said, Martoma "cultivated and purchased" the confidence of doctors to access confidential data on an experimental Alzheimer's drug, and used the info for illegal insider trading, helping SAC make profits and avoid losses. "Martoma bought the answer sheet before the exam - more than once - netting a quarter billion dollars in profits and losses avoided for SAC, as well as a $9 million bonus for him. In the short run, cheating may have been profitable for Martoma, but in the end, it made him a convicted felon, and likely will result in the forfeiture of his illegal windfall and the loss of his liberty," he said.

(Also See: Martoma's indictment)

- RM Nair

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