The trial of Mathew Martoma presents a challenge often seen in recent insider trading prosecutions: how to mount a defense denying any wrongdoing when the defendant is unlikely to testify. One way to persuade a jury to return a not-guilty verdict is by focusing on the ordinary nature of the trading to raise questions about whether any confidential information was even used.
Mr. Martoma, a former portfolio manager at SAC Capital Advisors, is charged with receiving advance notice about a failed drug trial being conducted by Elan and Wyeth and then persuading Steven A. Cohen, the firm’s founder and owner, to sell large positions in both companies. As DealBook reported, prosecutors called two doctors, Sidney A. Gilman and Joel Ross, to testify about how they gave Mr. Martoma confidential information on the study.
The two doctors received nonprosecution agreements from the government, but undermining their credibility can be difficult when each offers a similar story about disclosing information to Mr. Martoma. The government has shown in a number of cases that jurors are willing to credit such testimony, even from those who cut deals.
Overcoming that type of evidence can be difficult when the defendant does not tell the jury he did not receive the information or contend that it had no influence on the trading decision. Yet I expect there is little chance that Mr. Martoma will testify on his own behalf.
In the cases that have gone to trial in recent years, only one insider trading defendant, Douglas Whitman, took the witness stand to deny having traded on confidential information. He was still convicted and received a two-year prison sentence.
Prominent defendants with otherwise impeccable reputations, like Rajat K. Gupta, a former Goldman Sachs director convicted of leaking the bank’s boardroom secrets to the hedge fund manager Raj Rajaratnam, did not testify. Defense lawyers understand the danger of opening up a client to cross-examination by prosecutors that can give the jury the impression that the person is untruthful; such an outcome is the death knell for a white-collar crime defendant.
Even if Mr. Martoma wanted to testify, the disclosure that he was dismissed from Harvard Law School for doctoring a transcript and then tried to cover it up should be enough to keep him off the witness stand. When a defendant testifies, prior bad acts can be used to establish the person’s intent and knowledge, so prosecutors are sure to pounce on a prior instance of misconduct to show the jury that Mr. Martoma understood how to commit a fraud.
The crux of the case is that soon after Mr. Martoma received confidential information about the drug trial, SAC quickly sold its positions in Elan and Wyeth, two of its largest holdings, and then shorted the companies to avoid losses and realize profits of $276 million. The sheer size of the trading, along with the timing, creates a strong suspicion that it involved inside information.
To counter the suspicious nature of the transactions, the defense is arguing that SAC’s sales of Elan and Wyeth were unremarkable and therefore not indicative of insider trading. In the opening statement at trial, Mr. Martoma’s lawyer argued that hedge funds like SAC “take big positions to sell big positions, often around events,†and that the trading was “exactly the kind of prudent investment decision that a super-sophisticated and experienced investor like Steven Cohen was paid to make.†Mr. Cohen has not been charged with any wrongdoing.
To bolster its argument, the defense showed the jury charts about large trades by SAC in four other stocks â€" Altria, Anheuser-Busch, General Electric and Yahoo â€" to counter the notion that the Elan and Wyeth trades were extraordinary. Mr. Martoma did not deal with those companies, but the transactions can help show that SAC sold large positions on other occasions.
Mr. Martoma is offering the “there’s nothing to see here†defense by arguing that SAC’s trading was not out of the ordinary for a hedge fund with its investing style. Without being able to call him to testify, this is the next best way to contend that there is no basis to conclude the trades were based on inside information.
The government responded last week in a filing that asked Judge Paul G. Gardephe, who is presiding over the trial, to prohibit the defense from using other SAC trades, arguing that they were irrelevant because Mr. Martoma had nothing to do with them. Prosecutors then offered an explosive alternative to barring the evidence by asking for permission to introduce evidence of other insider trading at SAC as a counterbalance to show how the firm operated.
The government argues that Mr. Martoma wants to contend that these other trades were not based on inside information to bolster his defense that transactions in Elan and Wyeth were not improper. Usually a defendant cannot introduce evidence of other legal conduct to show the person did not act illegally, much as the government cannot show the person has a bad character to prove a crime.
To this point, Judge Gardephe has prohibited discussion of SAC’s guilty plea to insider trading charges because it is unrelated to the case against Mr. Martoma. But the reference in the opening statement to Mr. Cohen being “a super-sophisticated and experienced investor†raises the possibility that SAC’s dealings in other stocks might be a subject of inquiry during the trial.
The government’s filing also contains a veiled jab at SAC’s role in the case. It notes that the firm “has cooperated extensively with the Martoma defense team†by providing access to witnesses and documents without giving the government copies of what it furnished to defense lawyers. An individual or company can provide whatever help it wants to a defendant as long as it does not obstruct justice. SAC has been reported to be paying for Mr. Martoma’s lawyers, no doubt raising the government’s suspicions about the firm’s motives in this case.
This is certainly a difficult case for the defense because it wants to deflect as much attention away from Mr. Martoma as possible by contending that Mr. Cohen’s decision to sell the firm’s stakes in Elan and Wyeth had nothing to do with confidential information about the drug trial. The danger is that putting too much focus on SAC’s business practices raises the possibility that the government can point to other instances of insider trading admitted by the firm to show it had a culture tolerant of such misconduct.
Although Judge Gardephe is unlikely to allow the government to introduce evidence of SAC’s guilty plea at this point in the trial, the problem for the defense is that - in a phrase often heard at trial - it might “open the door†to otherwise inadmissible evidence by focusing on other trading by the firm. Courts are fond of giving the defense leeway in putting on its case, but there is a danger in offering too much.
