The convictions of Anthony Chiasson and Todd Newman in a lucrative insider trading case may well send a message to Mathew Martoma, the former SAC Capital portfolio manager, about the risks he runs if he fights similar charges filed against him.
The potential sentences of more than 10 years in prison that the two defendants face puts even more pressure on Mr. Martoma to cooperate in the government's apparent quest to get his former boss, Steven A. Cohen, the founder of SAC. (Mr. Cohen has not been accused of wrongdoing, and his spokesman has said that Mr. Cohen has acted appropriately.)
The case against Mr. Chiasson and Mr. Newman was a classic insider trading prosecution built on the testimony of analysts at their hedge funds who had confessed to receiving confidential information about Dell and Nvidia a nd then passing it on. The government did not have recordings of the defendants discussing the companies, the type of evidence that proved so devastating in other recent cases.
The cooperators, Spyridon Adondakis and Jesse Tortora, testified that they gave the information to their bosses, Mr. Chiasson and Mr. Newman, who understood that it was confidential and reaped a total of more than $70 million in profits.
The defense strategy was simple: Accuse the cooperators of lying about their bosses by making deals to save their own skins. Mr. Adondakis was described by the defense as an “easy, practiced liar,†while Mr. Tortora was assailed as someone who “cannot and should not be trusted.â€
The defendants called just two witnesses and rested their defense case after just a few minutes. Because the case rode on the credibility of the cooperators, Mr. Chiasson and Mr. Newman argued they were not aware that their underlings were passing on inside inform ation.
In addition to the securities fraud charges, the jury convicted the two defendants of conspiracy based on the wider circle of tippers and recipients who passed around confidential information. Although the two men did not deal with each other directly, the government claimed that they were part of a larger agreement to trade on inside information.
The conspiracy conviction may prove especially devastating to Mr. Newman. By far, the largest trade was made by Mr. Chiasson's firm in Dell right before a negative earnings announcement in August 2008 that netted $53 million in profits. Because the jury found they were members of the same conspiracy, Mr. Chiasson's gains are attributable to Mr. Newman, even if he was unaware of the trading.
The federal sentencing guidelines base much of the recommended sentence on the amount of the defendants' gains or losses avoided from the insider trading. Under the guidelines, Mr. Chiasson and Mr. Newman face a term of over 10 years in federal prison based on the benefits reaped from the transactions.
Another problem the defendants face is that Judge Richard J. Sullivan of the Federal District Court in Manhattan will decide their sentences. He has generally followed the recommended sentence in other cases, meting out substantial prison terms for insider trading.
For example, he sentenced Zvi Goffer to 10 years for his role in organizing a group of insider traders with ties to Galleon Group for trading that resulted in profits of as much as $20 million. At the sentencing hearing, Judge Sullivan noted that Mr. Goffer fought the charges by going to trial and only accepted responsibility after his conviction.
The judge told Mr. Goffer, “You decided to gamble with your future, and you lost.†That does not bode well for Mr. Chiasson and Mr. Newman, who have maintained their innocence and are unlikely to express contrition.
In 2010, Judge Sullivan imposed a six-year prison term on Joseph Contorinis, a former Jefferies Group fund manager, after his conviction for receiving tips in a case that also relied on the testimony of a cooperating witness. The profits were $7 million, about 10 percent of what Mr. Chiasson and Mr. Newman were accused of making on their trades.
It would not be a surprise for Judge Sullivan to hand down significant sentences near the 11 years Raj Rajaratnam received. His trading produ ced profits of approximately $63 million, similar to those realized by Mr. Chiasson and Mr. Newman, so the government is likely to argue that case may serve as a guidepost for determining their punishment.
The defendants can be expected to appeal their convictions. Two likely challenges will be to the sufficiency of the evidence of the conspiracy and to limitations the court placed on expert testimony about the trading at their hedge funds to show that the transactions were unlikely to have been based on inside information.
One ray of hope for them is the recent decision of the United States Court of Appeals for the Second Circuit allowing Rajat Gupta, convicted of tipping Mr. Rajaratnam, to remain free on bail while his case is on appeal.
Although the issues are different, Mr. Chiasson and Mr. Newman can point to that decision as a basis to allow them to avoid having to report to prison until their appeals are decided, which probably won't happen until 20 14.
Mr. Martoma was charged with trading on inside information about a clinical drug trial that the government claims produced profits and losses avoided for SAC of more than $270 million.
The charges depend almost entirely on the testimony of Dr. Sidney Gilman, a prominent neurologist who reached a nonprosecution agreement with prosecutors in exchange for his cooperation.
As in the case of Mr. Chiasson and Mr. Newman, the defense in Mr. Martoma's case will assail Dr. Gilman's credibility based on the favorable deal he received. But undermining his testimony may be more difficult because he did not trade on the information and is not a Wall Street insider who regularly dealt in financial information.
Prosecutors may be able to present Dr. Gilman as someone who got “played†by a sophisticated hedge fund trader. If a jury was willing to convict based on the testimony of witnesses like Mr. Adondakis and Mr. Tortora, there is a reasonably good chanc e Dr. Gilman's testimony will be sufficiently believable to support a conviction of Mr. Martoma.
A lawyer for Mr. Martoma has said that he expects his client to be exonerated.
The recommended sentence he would face if convicted starts at about 15 years, and even a sympathetic judge is likely to be swayed by the outsize benefits produced by the trading in deciding the punishment.
Whether Mr. Martoma will try to make a deal remains to be seen, and it is unclear what information he might provide about Mr. Cohen that would entice prosecutors into a favorable plea bargain. The convictions of Mr. Chiasson and Mr. Newman are unlikely to bolster Mr. Martoma's confidence that he can beat the charges he is facing.
