NEW YORK — Federal prosecutors brought what they called “the most lucrative insider trading scheme ever charged," filing a criminal case Tuesday against a former trader at a unit of the hedge fund SAC Capital.
Mathew Martoma, a former trader at CR Intrinsic, a division of SAC Capital, 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.
The case is the latest to put billionaire investor Steven Cohen and his hedge fund, SAC Capital, in the spotlight over insider trading crimes.
Martoma received the information from Sidney Gilman, a neurology professor at the University of Michigan, a leading expert in Alzheimer’s disease.
Gilman is cooperating with the government and has entered into a nonprosecution agreement with the U.S. attorney’s office in Manhattan.
Gilman connected with Martoma through an expert network firm based in New York. Expert networks became popular on Wall Street in the past decade, linking Wall Street money managers to specialists in various industries to help give them an edge on their investments. Expert networks have been a focus of the government’s widespread crackdown on insider trading at hedge funds.
His consulting work at the expert network firm earned Gilman more than $100,000, according to a parallel civil complaint against Martoma and Gilman filed Monday by the Securities and Exchange Commission.
According to the complaint, between 2006 and 2008, Martoma consulted with Gilman about the preliminary results of the drug trial and accumulated a roughly $700 million position in the stocks of Wyeth and Elan.
In June 2008, the complaint says, Martoma received secret information about negative data relating to the drug trials. Martoma caused SAC Capital to sell its entire inventory of roughly 10.5 million shares in Elan and about 7 million shares of Wyeth before the public release of the data. The day after the study was announced, Elan stock lost about 42 percent of its value and Wyeth dropped about 12 percent.
In a statement, U.S. Attorney Preet Bharara said: “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."