Federal authorities leveled charges last Tuesday against a portfolio manager formerly employed by an affiliate of SAC Capital Advisors L.P., the hedge fund founded by Corporation trustee Steven Cohen P’08.
The charges detail what could be one of the largest insider-trading schemes on record, and mark the fourth time in recent years that current or former employees of SAC Capital have been embroiled in insider-trading allegations. Though Cohen was not named in the criminal and civil suits filed Tuesday by the U.S. attorneys’ office in Manhattan and the Securities and Exchange Commission, some national media outlets portrayed the charges as part of a federal probe that has been slowly closing in on Cohen.
The Wall Street Journal identified Cohen as the man referred to as “Portfolio Manager A,” the “owner and founder” of the firm, in the SEC’s civil complaint. The suit said Portfolio Manager A authorized several trades based on information obtained via insider trading, though it did not allege Portfolio Manager A was aware of the illegal methods being used.
Mathew Martoma, the portfolio manager implicated in the suits who left SAC Capital in 2010, is alleged to have received advance information in 2008 on the negative results of clinical trials for a new drug to treat Alzheimer’s. Martoma allegedly urged SAC Capital to sell short its stock holdings in Elan Corporation P.L.C. and Wyeth Pharmaceuticals, the drug companies involved in the trials, just two weeks before their results were made public. The combination of profits earned and losses avoided on the trade amounted to $276 million, which prosecutors deemed the greatest insider-trading windfall ever.
Federal authorities tried unsuccessfully to persuade Martoma to become a cooperating witness in a larger criminal case against Cohen a year before they charged the portfolio manager with insider trading, the Wall Street Journal reported last Thursday. An agent from the Federal Bureau of Investigation showed up at Martoma’s Florida home but was unable to get him to assist with the investigation of Cohen, though Martoma’s cooperation could have reduced the length of the prison sentence he would face if convicted. The new revelation highlights authorities’ ambition to build a strong criminal case against Cohen.
The charges come as part of a broader government crackdown on illegal insider trading in recent years, amid extensive federal investigation into whether Wall Street has inappropriately received advance notice about clinical trial results. There have been more than 170 insider-trading actions advanced by the SEC in the past three years, according to an SEC press release.
“Mr. Cohen and SAC are confident that they have acted appropriately and will continue to cooperate with the government’s inquiry,” SAC Capital spokesperson Jonathan Gasthalter told The Herald.
Martoma allegedly received the information from Sidney Gilman, a professor of neurology at the University of Michigan Medical School who was involved with the clinical trials. The SEC filed a civil-fraud suit against Gilman as well.
According to news reports, Martoma and Gilman first connected through the system of expert networks, which are legal means for companies to obtain general scientific information. But Martoma allegedly exploited that relationship to get specific private results illegally. In one case, Gilman forwarded Martoma a PowerPoint with the trials’ negative results, the suits claimed.
The shifting nature of clinical trials – which companies now usually conduct on their own products in secret, rather than to advance public scientific knowledge – has made the process “a very different and not a very nice game,” said Roy Poses ’73 MD’78, clinical associate professor of medicine at the Alpert Medical School.
In his sole experience talking with investors through such networks, Poses said he was aware that he could only offer broad information about his field. “I clearly couldn’t tell them anything about ongoing trials or anything that … they couldn’t have just read out of an article,” he said.
Poses added that he thought Cohen’s potential involvement in the latest insider-trading charges reflected poorly on the University. “The troubling aspect is that we look to the Corporation … to uphold the mission of Brown and sort of be stewards of the University,” he said. “Ideally, I would like the Corporation to be people who are fine, upstanding people without question about their character.”
Cohen is generally considered one of Wall Street’s biggest players. He earned a spot on Time Magazine’s 2007 list of the world’s 100 most influential people, and Forbes ranked him the 106th wealthiest this year. Cohen is a prolific art collector who at one time expressed interest in purchasing the Los Angeles Dodgers.
Cohen is not the first Corporation member to come under investigation for potentially unethical financial dealings. Former Corporation fellow Steven Rattner ’74 P’10 P’13 P’15, a former Herald editor-in-chief, was barred from the securities industry for two years in November 2010 as part of a settlement after his private investment firm, Quadrangle Group, was scrutinized for a pay-to-play pension fund scheme.
The office of the Vice President for Public Affairs and University Relations had not returned a request for comment as of Sunday evening.
An earlier version of this article appeared online Nov. 22, 2012.