Over the last half-decade, as federal authorities secured dozens of insider trading convictions against hedge fund traders, they have tried doggedly to build a case against one of Wall Street’s most influential players: the billionaire stock picker Steven A. Cohen.
On Tuesday, the government appeared to inch closer to that goal. Prosecutors brought charges against a former portfolio manager at the hedge fund SAC Capital Advisors in a case that for the first time directly involves Mr. Cohen, the fund’s founder.
Mathew Martoma, a former portfolio manager at CR Intrinsic, a unit of SAC, was charged with making more than $276 million in a combination of illegal profits and avoided losses by obtaining secret information from a doctor about clinical trials for an Alzheimer’s drug being developed by the companies Elan and Wyeth.
The case is “the most lucrative insider trading scheme ever charged,” said Preet Bharara, the United States attorney in Manhattan, who brought the charges in Federal District Court in Manhattan.
It also draws in Mr. Cohen, whose fund has been in the cross hairs of government investigators since the crackdown on insider trading began. Though not charged or mentioned by name, Mr. Cohen is referred to repeatedly in the government’s court filings as either “Portfolio Manager A” or the “owner” of the funds involved. People briefed on the case confirmed that the reference was to Mr. Cohen.
Mr. Martoma worked closely with Mr. Cohen in buying and selling large blocks of Elan and Wyeth shares, according to a lawsuit also filed on Tuesday by the Securities and Exchange Commission.
The government does not say that Mr. Cohen — who has not been charged in the case — knew that Mr. Martoma had confidential information about the companies’ Alzheimer drug when he bought and sold the stocks.
“Mr. Cohen and SAC are confident that they have acted appropriately and will continue to cooperate with the government’s inquiry,” said Jonathan Gasthalter, a SAC spokesman.
From the middle of an expansive trading floor in SAC’s Stamford, Conn., headquarters, Mr. Cohen, 56, oversees a fund that manages about $13 billion and, including borrowing from banks, possesses about $39 billion in total buying power. The fund, which has about 900 employees, has generated some of the best investment returns on Wall Street, averaging about 30 percent over the last two decades.
Though the case against Mr. Martoma is the first time the government has pointed to Mr. Cohen’s participation in a trade that may have been improper, it is the latest in a spate of insider trading prosecutions of former SAC employees. At least seven former SAC employees have been tied to the government’s multiyear investigation; three of them have pleaded to insider trading while working for Mr. Cohen.
Previous cases involving SAC have highlighted the firm’s unusual structure: traders are allocated money and invest on their own with little direct input from Mr. Cohen. But in this case, Mr. Cohen is said to have had numerous contacts with Mr. Martoma and appeared to collaborate closely with him.
“The law of averages would tell you that all of these instances at one firm are not coincidences,” said Mark Zauderer, a securities lawyer in New York. “People take their cues from the top, and these cases must reflect a culture there.”
F.B.I. agents arrested Mr. Martoma, 38, early Tuesday morning at his home in Boca Raton, Fla. He was released on bail after making an appearance in Federal District Court in West Palm Beach. Mr. Martoma, who has been unemployed since leaving SAC in 2010, is expected to appear in federal court in Manhattan on Monday and enter a plea.
“Mathew Martoma was an exceptional portfolio manager who succeeded through hard work and the dogged pursuit of information in the public domain,” said his lawyer, Charles A. Stillman. “What happened today is only the beginning of a process that we are confident will lead to Mr. Martoma’s full exoneration.”
Also accused in the scheme by the Securities Exchange Commission on Tuesday was Sidney Gilman, a neurology professor at the University of Michigan. The S.E.C. said Dr. Gilman, 80, an Alzheimer’s expert who helped oversee the clinical trials for the drug, gave Mr. Martoma the confidential information.
Dr. Gilman is cooperating with the government and has entered into a nonprosecution with the United States attorney’s office in Manhattan, meaning that criminal charges will not be brought against him. Marc Mukasey, a lawyer for Dr. Gilman, said that he expected the S.E.C.’s case to be resolved shortly.
Mr. Martoma met Dr. Gilman through the Gerson Lehrman Group, a so-called expert network firm based in New York. Once an obscure pocket of Wall Street, expert network firms became popular among the hedge fund set in the last decade as a way to gain an investment edge. The services linked traders to specialists and consultants in various industries.
But these firms came under scrutiny after the government brought more than a dozen insider trading cases involving these expert networks. In some cases, hedge fund managers paid outside consultants handsome fees for providing confidential information about publicly traded companies. In others, the government charged executives at the expert network firms with knowingly facilitating the exchange of illegal stock tips.
A spokesman for Gerson Lehrman declined to comment. The government’s complaint details how Dr. Gilman hid his communications about the trial from the expert network firm.
Dr. Gilman’s consulting work for Mr. Martoma earned him about $108,000, according to court filings. Based in part on Dr. Gilman’s leaks about positive developments related to the clinical trials of a new Alzheimer’s drug, SAC accumulated a roughly $700 million position in the stocks of Wyeth and Elan, according to the government.
The S.E.C. said that the fund’s owner, Mr. Cohen, took a large position in Wyeth and Elan in his personal portfolio based on Mr. Martoma’s recommendation. Mr. Cohen maintained his holdings even though there was significant debate about the wisdom of such a large position in the companies, the government said.
But in July 2008, as the trials neared completion, Dr. Gilman told Mr. Martoma that patients were experiencing serious side effects, prosecutors say. Afterward, Mr. Martoma e-mailed Mr. Cohen, telling him “it’s important” that they speak. They spoke on the phone for nearly 20 minutes, the government says, and Mr. Martoma told his boss that he was no longer “comfortable” with the investments.
The following day, SAC reversed course. Mr. Cohen’s head trader sold the firm’s entire inventory of roughly 10.5 million shares of Elan and about seven million shares of Wyeth, the government said. Once it had dumped the shares, SAC built a short position in the two stocks, betting their value would drop.
According to the S.E.C., the trader, Mr. Cohen and Mr. Martoma kept the sales confidential. The trade, wrote the head trader in an e-mail to Mr. Cohen, “was executed quietly and efficiently over a four-day period through algos and darkpools” — referring to trades using algorithms and to trading platforms that do not have the same reporting requirements as the stock exchanges — “and booked into two firm accounts that have very limited viewing access.”
After the companies announced the results of the trials, Elan’s stock fell about 42 percent and Wyeth’s about 12 percent.
The trading allowed SAC to avoid about $194 million in losses and earn about $83 million in profits on Elan and Wyeth, according to prosecutors.
At the end of 2008, Mr. Martoma received a bonus of about $9.3 million, the S.E.C. said. Mr. Martoma’s stock picks were less successful in 2009 and 2010, and he received no bonuses then.
According to the government, in 2010 an SAC executive suggested in an e-mail that the firm let Mr. Martoma go, describing him as a “one-trick pony.”
| NAMES | THE CASES |
|---|---|
| Jonathan Hollander | The former analyst paid more than $220,000 to settle civil charges brought by the Securities and Exchange Commission accusing him of trading in his personal account on confidential information about the 2006 takeover of the Albertsons grocery store chain. |
| Jon Horvath and Michael Steinberg |  Mr. Horvath, right, a former technology industry analyst, pleaded guilty in September to participating in a conspiracy that illegally traded in the shares of Dell computer. His boss, the former portfolio manager Mr. Steinberg, has been named as an unindicted co-conspirator but has not been charged in the case. Federal prosecutors contend they were part of a seven-person conspiracy — a “circle of friends” — that earned about $62 million in illegal gains trading on secret tips from executives at publicly traded technology companies. |
| Donald Longueuil and Noah Freeman |  The two former portfolio managers admitted in 2011 to trading on illegal tips about publicly traded technology companies. Mr. Longueuil, right, was swept up in a crackdown on so-called expert networks. He is one of roughly a dozen implicated in the case. Mr. Longueuil is serving a two-and-a-half-year jail term at a federal prison in Otisville, N.Y.; Mr. Freeman, who is cooperating with prosecutors, has yet to be sentenced. |
| Mathew Martoma | The former trader at CR Intrinsic, a unit of the hedge fund, was charged with making about $276 million in combined profits and avoided losses by obtaining confidential information about a drug trial for an Alzheimer’s drug developed by the pharmaceutical companies Elan and Wyeth. |
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