Former SAC Trader Found Guilty of Insider Trading

Updated, 2:48 p.m. | A federal jury in Manhattan on Thursday convicted Mathew Martoma on insider trading charges in what may be the last criminal case to emerge from a decade-long investigation of Steven A. Cohen and his SAC Capital Advisors hedge fund.

The jury of seven women and five men found Mr. Martoma, a former SAC portfolio manager, guilty of seeking out confidential information related to a clinical trial for an experimental Alzheimer’s drug. The inside information â€" provided mainly by a doctor familiar with the results of the clinical trial who was the government’s main witness â€" helped SAC avoid losses and generate profits totaling $275 million in July 2008.

The 39-year-old former trader, who is married and has three young children, is expected to face a prison sentence of seven to 10 years.

The guilty verdict is the latest setback for Mr. Cohen and his 22-year-old firm, which itself pleaded guilty to securities fraud charges in November and agreed to pay a $1.2 billion penalty. Mr. Cohen, 57, has not been charged with any criminal wrongdoing and it is unclear whether he ever will be. But the verdict comes as Mr. Cohen is moving forward with plans to reconfigure his firm into a family office that will mainly manage his $9 billion in personal wealth.

Mr. Martoma is the eighth person who once worked for Mr. Cohen to either be convicted at trial or plead guilty to insider trading, a dubious record of achievement that led prosecutors to call SAC a “veritable magnet for market cheaters” when they indicted the hedge fund, which at one time managed $14 billion, on securities fraud charges last July.

Richard Strassberg, a lawyer for Mr. Martoma, said, “We’re very disappointed and we plan to appeal.”

Manhattan U.S. Attorney Preet Bharara said after the conviction that “cheating may have been profitable for Martoma, but in the end, it made him a convicted felon, and likely will result in the forfeiture of his illegal windfall and the loss of his liberty.

Jury reached a verdict after a little more than two days of deliberation. Mr. Martoma was stone-faced as the verdict was read, while his wife, Rosemary, cried with her hands clasped together.

The judge did not immediately set a sentencing date.

Testimony during the three-week trial in the United States District Court in Lower Manhattan made clear that Mr. Cohen had directed much of the trading in shares of the two drug stocks â€" Elan and Wyeth â€" at the center of the case. At one point during the proceedings, Dr. Sidney Gilman, the prosecution’s main witness, who testified that he provided confidential drug trial information to Mr. Martoma, told the jury that federal agents initially told him that the real target of the investigation was Mr. Cohen and not Dr. Gilman or Mr. Martoma.

The trial began just as Judge Paul G. Gardephe unsealed information in the case revealing that Mr. Martoma was expelled from Harvard Law School in 1999 for doctoring his transcript. But the evidence of Mr. Martoma’s cheating at Harvard was not introduced at trial.

Mr. Martoma’s conviction could invite closer scrutiny of SAC’s founder, just as he begins to restructure his once wildly successful hedge fund, closing its door to outside investors and splitting into three separate units and settling upon a new name.

Jonathan Gasthalter, an SAC spokesman, declined to comment.

Federal authorities have said they continue to investigate allegations of insider trading in several other stocks that SAC traded in but at the moment there are no pending criminal cases against any former or current SAC employees. Also, the clock is ticking on the legal deadline for filing criminal charges on most of the stock trading authorities have investigated for the past several years.

But a person briefed on the matter, who was not authorized to publicly speak about the investigation, said prosecutors are not close to bringing any charges against Mr. Cohen.

Mr. Cohen still faces a civil administrative failure to supervise action filed by the Securities and Exchange Commission, which arises largely from the insider trading charges on which Mr. Martoma was convicted.

With Mr. Martoma’s conviction, the United States attorney’s office in Manhattan extends an unbroken string of successes in prosecuting insider trading cases. To date, Mr. Martoma is the 79th person to either plead guilty or be convicted since this crackdown on insider trading in the $2.2 trillion hedge fund industry began with a series of prominent arrests in 2009.

The case against Mr. Martoma was notable because it was the first time that Mr. Cohen was linked to questionable trades at his firm. For more than two years, federal prosecutors and agents with the Federal Bureau of Investigation had pressed Mr. Martoma to cooperate.

Federal authorities have long been interested in learning what Mr. Martoma told Mr. Cohen during a 20-minute phone call on July 20, 2008, a day before Mr. Cohen instructed a top trader at SAC to begin unloading its roughly $700 million position in shares of Elan and Wyeth.

Dr. Gilman testified that just days before that phone call, he had shared with Mr. Martoma the results of the clinical trial for the experimental drug, which had revealed more troubling side effects with the Alzheimer’s treatment.

Over the course of four weeks, the lead prosecutor, Arlo Devlin-Brown, sought to demonstrate how Mr. Martoma “seduced” and then “corrupted” Dr. Gilman and another doctor to provide him with inside information.

Dr. Gilman, 81, was the chairman of a Elan safety committee during the drug trial. He told the jury how Mr. Martoma pursued a friendship with him, and that, under persistent questioning, he “slipped” and gave the hedge fund manager secret information even though he knew it was illegal.

But the defense countered that the information Dr. Gilman provided was already publicly known and brought forward analysts at other financial firms who testified that Dr. Gilman gave them similar information.

Marc Mukasey, the lawyer for Dr. Gilman, said his client was satisfied with his testimony and cooperation and “had no motive to do anything other than tell the truth.” Mr. Mukasey added, “He wasn’t trying to help or hurt either side.”