The trial of Mathew Martoma, a former portfolio manager at SAC Capital Advisors, is the big kahuna for federal prosecutors. While they have won convictions in a number of insider trading trials, this is among the most significant cases because of the dollar amount of the trading, approximately $276 million, and the involvement of Steven A. Cohen, SAC’s founder and owner.
To that end, prosecutors are pulling out all the stops in trying to show that Mr. Martoma misused confidential information about a failed clinical trial of an Alzheimer’s drug to induce Mr. Cohen to quickly sell large positions in the two companies developing it, Elan and Wyeth. Prosecutors have asked Federal District Judge Paul G. Gardephe to admit evidence that Mr. Martoma sought inside information about other drug trials to show that this was a consistent means of gaining an “edge†at SAC.
A favorite tactic of prosecutors in a case built on circumstantial evidence is to introduce other bad acts by a defendant to show the person acted as part of a consistent course of conduct. As a general rule, the government cannot use evidence of other wrongful acts to show the defendant is a bad character and therefore more likely to have committed the crime.
But Federal Rule of Evidence 404(b) contains an important loophole that permits the use of evidence to show a defendant’s “motive, opportunity, intent, preparation, plan, knowledge, identity, absence of mistake, or lack of accident.â€
Federal prosecutors want to introduce evidence about how Mr. Martoma sought confidential information about other drug trials. The government plans to call two doctors, Sidney Gilman and Joel Ross, both of whom received nonprosecution agreements, to testify about how they provided other confidential information to Mr. Martoma.
Although the evidence does not relate directly to the trading in Elan and Wyeth, the government wants to paint a picture for the jury of Mr. Martoma as someone who sought out inside information regularly to show that this was part of a broader scheme. Prosecutors do not contend that he broke any laws with the information but argue that it provides context for when he received information from Dr. Gilman that turned out to be worth about $276 million for SAC.
Prosecutors have also asked the court to allow them to call an SAC research analyst to testify about how Mr. Martoma directed him to visit a doctor and obtain confidential information before a presentation about the results of a different drug trial. This took place in 2009, after the trading in Elan and Wyeth, but the government argues that “this is evidence of the defendant’s knowledge, intent and lack of mistake†under Rule 404(b).
Needless to say, Mr. Martoma’s lawyers object strenuously to the request to introduce this evidence, arguing that it is irrelevant to the trading in Elan and Wyeth and unfairly prejudicial to their client.
It is often the case in a criminal trial that the government wants an expansive approach to what the jury should hear in the hope that the sheer mass of evidence can establish guilt. Defense lawyers work to exclude evidence that puts their client in a bad light so that the focus is solely on the particular acts and not the defendant’s character. Rule 404(b) offers little real guidance on what should be admitted because the prohibition on character evidence is subject to such a broad exception that almost anything plausibly connected to a defendant’s motive, plan, intent or knowledge can be admitted.
Mr. Martoma’s lawyers want to present a radically different picture about the use of any information he received about the drug trial. Insider trading requires proof that the trading was made on the basis of confidential information, which means establishing a link between the information and the decision to trade.
Mr. Martoma has filed a motion asking the court to permit the defense to introduce part of a transcript of Mr. Cohen’s testimony in 2012 during an insider trading investigation into SAC by the Securities and Exchange Commission. Mr. Cohen told the S.E.C. investigators that Mr. Martoma told him only that he had become “uncomfortable†with the firm’s positions in Elan and Wyeth. Mr. Cohen then consulted with another portfolio manager, for whom he professed great respect, before deciding to sell the shares.
For the defense, this evidence can plant the seed of reasonable doubt that Mr. Martoma was the moving force behind SAC’s sales of Elan and Wyeth. The government’s strongest circumstantial evidence of that link is a 20-minute phone call on July 20, 2008, between Mr. Martoma and Mr. Cohen, after which SAC sold its positions in Elan and Wyeth at Mr. Cohen’s direction. If the decision to sell was unrelated to any information Mr. Martoma might have received, then there is no insider trading.
The best source of evidence about the content of that conversation and the reason for the subsequent sales is Mr. Cohen, who could provide helpful testimony for the defense. But Mr. Cohen’s lawyer indicated he will not testify at the trial by asserting his Fifth Amendment right against self-incrimination.
This puts Mr. Martoma in a difficult position because courts generally will not grant a witness immunity so that a defendant can call the person to testify. The authority to seek immunity rests almost completely with the Justice Department, and prosecutors have no interest in giving Mr. Cohen immunity because of the potential effect it could have on their continuing investigation of him.
The problem with letting the jury hear Mr. Cohen’s testimony is that it is hearsay, which is an out-of-court statement offered for the truth of the matter asserted. Even though he was placed under oath by the S.E.C., it was not the type of proceeding in which each side had an opportunity to fully question the witness, which is usually required before testimony from another case can be used.
I think the court is unlikely to admit Mr. Cohen’s testimony, or at best will only allow extremely limited use of it, because he will not be in court for the jury to evaluate his credibility.
An intriguing question about Mr. Cohen’s testimony is how little light it sheds on what he discussed with Mr. Martoma for 20 minutes. He stated that he only recalled Mr. Martoma expressing his discomfort with Elan and Wyeth, and reiterated that point when Mr. Cohen pressed further. But beyond that, Mr. Cohen had no recollection of the conversation, which makes one wonder what they talked about for so long.
Most trials involve pretrial sparring over what evidence should be admitted. Judge Gardephe may rule on the motions at a hearing on Monday before jury selection begins, although he could withhold a final decision on whether to allow the evidence until he sees how case develops at trial.
Mr. Cohen will be a Sphinx in this case, a key player who directed the sale of Elan and Wyeth after speaking with Mr. Martoma but not available to testify for either side. Instead, this will be a case built on circumstantial evidence that will require the jury to decide whether a phone call was the basis on which insider trading resulted in $276 million in gains and losses avoided for SAC.
