Portfolio Manager Charged Over Role In $276 Million Insider Trading Scheme

Portfolio Manager Charged Over Role In $276 Million Insider Trading Scheme

NEW YORK - (Mealey's) The U.S. attorney for the Southern District of New York, in conjunction with the Federal Bureau of Investigation, on Nov. 21 announced the unsealing of insider trading charges against a former portfolio manager for a division of a group of affiliated hedge funds for his role in an alleged $276 million insider trading scheme (United States of America v. Mathew Martoma¸ No. 12-2985, S.D. N.Y.).

In a press release announcing the unsealing of the charges, U.S. Attorney Preet Bharara and FBI Special Agent-In-Charge April Brooks stated that portfolio manager Mathew Martoma allegedly used inside information provided to him by a doctor who served as an adviser to Elan Corp. PLC on the clinical trial of an Alzheimer's disease drug, bapineuzumab, "to make profits and avoid losses for the Hedge Fund in an amount totaling approximately $276 million."

In particular, Martoma is alleged to have arranged more than 40 paid consultations with the doctor between 2006 and July 2008 in an attempt to secure inside information about the drug trial. He is charged with two counts of securities fraud and a single count of conspiracy to commit securities fraud.

Penalties

According to the press release, which is available online at http://www.justice.gov/usao/nys/pressreleases/November12/MartomaMathewChargePR.php, Martoma faces "a penalty of five years in prison for the conspiracy charge and 20 years in prison on each of the two securities fraud charges. With respect to the conspiracy charges, he faces a maximum fine of $250,000 or twice the gross gain or loss derived from the crimes, and for the securities fraud charges, he faces a maximum fine of $5 million or twice the gross gain or loss derived from the crime on each charge."

Martoma is scheduled to appear in the U.S. District Court for the Southern District of New York at 10 a.m. on Nov. 26.

The Securities and Exchange Commission also issued a press release Nov. 21 announcing that it too has filed charges against Martoma, as well as the hedge fund for which he worked, CR Intrinsic Investors LLC, in the District Court (Securities and Exchange Commission v. CR Intrinsic Investors LLC, et al., No. 12-8466, S.D. N.Y.).

SEC Violations

The SEC claims that the defendants violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 by engaging in the insider trading scheme. It seeks disgorgement of the defendants' "ill-gotten gains plus prejudgment interest" and financial penalties, as well as a permanent injunction enjoining the defendants from future violations Sections 10(b) and 17(a) and Rule 10b-5.

The SEC further revealed that Dr. Sidney Gilman provided Martoma with the inside information and that the doctor has agreed to pay more than $234,000 in disgorgement and prejudgment interest to settle the claims against him. The settlement is subject to court approval.

Moreover, the SEC contends that the total illicit gains comprising profits and the avoidance of losses enjoyed by the defendants is more than $875 million.

The SEC's press release is available online at http://www.sec.gov/news/press/2012/2012-237.htm.

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