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Wednesday 27 August 2014

'Elan guy' at centre of US insider trading case

Published 25/11/2012 | 05:00

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An ex-hedge fund manager has been charged in connection with a $276m 'scam', reports Katherine Burton

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Mathew Martoma got off to a slow start in the hedge-fund world. A former student at Harvard Law School, he co-wrote papers on medical ethics before seeking a business degree at Stanford University and joining a little-known Boston hedge fund. Former colleagues say he was nondescript, and other hedge-fund managers never heard of him.

Yet in 2006, at age 32, Martoma made it to SAC Capital Advisors LP and gained the attention of the firm's billionaire owner Steven A Cohen. Cohen, one of the most successful hedge-fund managers in the world, trusted Martoma's recommendations enough to accumulate about $700m in shares of Elan Corp and Wyeth LLC two years later and then sell them all within a week after Martoma had changed his view on the firms.

Those recommendations, which earned the young portfolio manager a $9.38m bonus, have now landed Martoma at the centre of what US prosecutors describe as the most lucrative insider-trading scheme they've ever uncovered, with profits and averted losses of $276m.

Early in the morning of November 20, FBI agents arrested the 38-year-old at his Boca Raton home. The charges against him mark the first time prosecutors said Cohen had talked with a defendant about stocks in an insider-trading case, pulling the art collector deeper into one of the biggest investigations of securities fraud in history.

"Mathew Martoma was an exceptional portfolio manager who succeeded through hard work and the dogged pursuit of information in the public domain," his lawyer Charles Stillman said in an emailed statement, adding that he expected Martoma to be fully exonerated.

Martoma grew up in Florida, according to records. As an 18 year old, he lived in Merritt Island, Florida, less than 10 miles from Cape Canaveral, where Nasa's Kennedy Space Center is located. His mother, Lizzie Thomas, was a doctor, according to public records. His father, Bobby Martoma, owned a dry cleaner until two years ago.

Mathew Martoma got his undergraduate degree at Duke University in Durham, North Carolina. During his first year, he was inducted into Phi Eta Sigma, an honours society for freshmen who attain at least a 3.5 grade point average, according to the university registrar. He graduated in December 1995.

Less than two years later, he went off to Harvard Law School. He wrote two medical-ethics papers, one of which identifies him as a member of Harvard Law's class of 2000.

He left Harvard in December 1998 without attaining a degree, and attended Stanford Business School, where he joined three alumni groups including MBA Class of 2003.

In 2001, he changed his name from Ajai Mathew Mariamdani Thomas, according to court records. His father had changed his name to Martoma two years before.

In 2003, the year Martoma got married, he joined Boston- based Sirios Capital Management LP as a research analyst, according to public records. Sirios, a stock hedge fund co-founded by John Brennan in 1999, managed $1bn as of June 30. He stayed there until 2006, when he moved to SAC's CR Intrinsic unit, based in Stamford, Connecticut.

Former colleagues, who asked not to be named because the fund is private, said Martoma, who stood almost 6ft tall, had a quiet demeanor and left little impression except for an outsized trade that earned him the name "the Elan guy".

As part of his job investing in health-care stocks, Martoma began talking to Sidney Gilman, a doctor involved in the trials of the experimental Alzheimer's drug being developed by Elan and Wyeth, according to the complaints. Gilman eventually shared inside information on test results of an experimental Alzheimer's drug with Martoma, according to prosecutors and the SEC, which has sued both men.

Based on Gilman's inside information, Martoma built up stakes in the two companies and persuaded Cohen to do the same for the account he runs at SAC, the government said in the court papers. Cohen ignored other analysts who thought the Elan position was too risky, saying he had confidence in Martoma's views because he was "closest" to the drug trial, according to the criminal complaint, which cited a March 28, 2008, instant message from Cohen.

By the end of June 2008, the hedge fund had amassed $328m of shares of Elan and $373m of Wyeth, according to the criminal complaint. The next month, the US alleged in its complaint, Gilman tipped off Martoma that the drug trial results would be disappointing. SAC sold off its entire holdings, worth about $700m, and then bet against the two stocks, which slumped after the results were made public. The hedge fund made $76.2m on the short sales, the government said.

"Mr Cohen and SAC are confident that they have acted appropriately and will continue to cooperate with the government's inquiry," Jonathan Gasthalter, a spokesman for the $14bn firm, said last week.

Gilman has entered into a non-prosecution agreement with the US government, according to his lawyer, Marc Mukasey. He is cooperating with the SEC and the US Attorney's office, the lawyer said.

Martoma's bonus in 2008 was his last. He lost money in 2009 and 2010, and his employment was terminated that September after a SAC executive called him a "one-trick pony with Elan", according to the complaint.

Martoma and his wife Rosemary, a pediatrician, moved to Boca Raton, to take care of family matters, said a person familiar with him.

He spent part of his bonus on their $1.9m, five- bedroom home, a pool, and a fake lawn. They started a family foundation with $1m. Martoma tried to start a securities business. His wife registered with the state to practise medicine, according to public records.

Neighbours, who asked not to be named, said the couple have three children and have kept to themselves. They are rarely seen and aren't members of the local country club.

Martoma is free on $5m bail co-signed by his in-laws. He's ordered to appear in Manhattan federal court tomorrow morning.

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