In the AIM program we have a course devoted to investment ethics. Unfortunately, there is no shortage of 'real world' material to learn from. In this most recent case, Mathew Martoma, a former portfolio manager at billionaire Steven A. Cohen's SAC Capital Advisors LP hedge fund, was sentenced on Monday to nine years in prison for engaging in what authorities called the most lucrative insider trading scheme in U.S. history. (Note: much of this material is from news accounts from Reuters and Bloomberg).
U.S. District Judge Paul Gardephe in New York said he had to account for the "enormous" $275 million gain SAC obtained as a result of illegal trades in pharmaceutical stocks. Prosecutors said the trades were based on tips Martoma received about a clinical trial for an Alzheimer's drug.
"I cannot and will not ignore that the gain is hundreds of millions of dollars more than ever seen in an insider trading prosecution," Gardephe said.
The sentence came despite appeals for leniency by Richard Strassberg, Martoma's lawyer, who cited "fragile family circumstances." Gardephe also ordered Martoma to forfeit $9.3 million, including his Boca Raton, Florida, home.
While Martoma, 40, faced up to 19-1/2 years in prison under federal sentencing guidelines, Gardephe said such punishment should be reserved for repeat offenders or criminal enterprise leaders.
But the judge said a severe sentence was nonetheless necessary, saying "there was nothing accidental about Mr. Martoma's conduct or the gain realized."
The nine-year sentence is among the longer prison terms in U.S. insider trading cases, reflecting a trend of increasingly lengthy sentences in recent years.
In 2012, corporate lawyer Matthew Kluger was sentenced in New Jersey to 12 years for trading on information from law firms about mergers. A year earlier, Galleon Group hedge fund founder Raj Rajaratnam was sentenced in New York to 11 years.
Manhattan U.S. Attorney Preet Bharara, whose office is engaged in a broad crackdown on insider trading, called the nine-year sentence "well-suited to the audacity of the illegal trading in this case."
The case against Martoma, who worked in SAC's CR Intrinsic Investors unit, stemmed from a long-running insider trading investigation of the hedge fund.
Eight employees have been convicted, and SAC last year agreed to pay $1.8 billion in criminal and civil settlements and plead guilty to fraud charges.
SAC recently changed its name to Point72 Asset Management, and the Stamford, Connecticut-firm was transformed into a family office managing Cohen's fortune.
Prosecutors said Martoma sought confidential information from doctors involved in a clinical trial of an Alzheimer's drug being developed by Elan Corp, since acquired by Perrigo Co (PRGO.N), and Wyeth, now a unit of Pfizer Inc (PFE.N).
Based on a tip Martoma received from Sidney Gilman, a former University of Michigan professor who chaired the drug's safety monitoring committee, SAC Capital in July 2008 began selling its $700 million position in Elan and Wyeth, prosecutors said.
They said most of the trading occurred in accounts controlled by Cohen, who had a 20-minute phone call with Martoma after receiving information about the negative results of the study.
Cohen has not been criminally charged. He faces a U.S. Securities and Exchange Commission civil action seeking to bar him from the financial services industry for failing to supervise Martoma and Michael Steinberg, an SAC portfolio manager convicted of insider trading in a separate trial in December. Cohen denies wrongdoing.