The impressive streak of 79 insider trading convictions won by the United States attorney’s office in Manhattan now includes Mathew Martoma, who dealt directly with the hedge fund titan Steven A. Cohen. But the verdict is unlikely to bring prosecutors any closer to what is apparently their aim: to bring criminal charges against Mr. Cohen.
Mr. Martoma was convicted of conspiracy and two counts of securities fraud for using inside information about a failed Alzheimer’s drug trial as a basis for selling shares of Elan and Wyeth, two companies developing the drug. SAC Capital Advisors, Mr. Cohen’s hedge fund firm where Mr. Martoma was a portfolio manager, avoided losses and reaped profits of about $275 million in 2008 by selling large positions in the two companies and then shorting the shares.
The focal point of the government’s case was a 20-minute telephone call from Mr. Martoma to Mr. Cohen shortly after receiving information from a University of Michigan doctor involved in the drug trial, Sidney Gilman, a crucial government witness. Mr. Cohen, who was not accused of wrongdoing in this case, ordered the sale of shares in Elan and Wyeth the morning after the call.
This was as close as the government has been to connecting Mr. Cohen to the insider trading at his firm. Although the investigation continues, Mr. Martoma’s refusal to cooperate meant that prosecutors did not have enough evidence to establish that Mr. Cohen knew he was trading on confidential information, a prerequisite to proving a case against him.
Judge Paul G. Gardephe of the United States District Court in Manhattan has not yet set a sentencing date, but it is likely to take place in the next four to six months. The potential punishment that Mr. Martoma faces is significant, and there is a good chance he will receive a sentence of as much as 10 years.
The federal sentencing guidelines recommend about 15 to 20 years in prison, if calculated on the gains SAC reaped from the trading. If that guideline is followed, it would be the highest sentence ever given for insider trading, exceeding the 12-year prison term for Matthew Kluger in 2012 for tipping information from his law firm that generated about $35 million in profits.
It is Judge Gardephe who will decide Mr. Martoma’s prison term, and he has not demonstrated a pattern in previous white-collar cases. A statement he made in a 2010 sentencing in an insider trading case is something the Justice Department is likely to point to in seeking a significant prison term.
In that case, the defendant sought probation. But Judge Gardephe instead imposed a three-month sentence, stating: “Given the enormous financial awards as a result of this kind fraud and the difficulties of detecting it, it is my belief that a term of imprisonment is often appropriate in this type of case to serve certain objectives and general deterrence and respect for the law.â€
Yet the judge does not always follow the government’s recommendation when prosecutors seek a significant penalty involving a white-collar defendant. When he sentenced a former Tiffany executive for stealing $1.2 million in jewelry from the company’s flagship Fifth Avenue store, Judge Gardephe rejected the prosecution’s request for a prison term of 37 to 46 months as provided in the sentencing guidelines. Instead, he sentenced her to 12 months and a day â€" less than one-third of what the government sought.
Prosecutors are likely to seek the maximum sentence for Mr. Martoma, and will point to a record of dishonesty that predates his time with SAC.
Mr. Martoma was kicked out of Harvard Law School for creating a doctored transcript in seeking a judicial clerkship and then trying to cover it up. It’s not clear whether he disclosed that information to Stanford University when he later applied to its M.B.A. program. Although the government was not allowed to use the Harvard expulsion at trial, it can be considered in evaluating Mr. Martoma’s character as part of the sentencing process.
Even if the Judge Gardephe does not follow the sentencing guidelines recommendation, there is a good chance he will not deviate significantly from it because of the huge amount of money involved in the case. The $275 million in trading gains and losses avoided dwarfs the amounts seen in other insider trading prosecutions that resulted in long prison terms. Raj Rajaratnam received an 11-year prison term for gains of over $60 million, and Zvi Goffer is serving 10 years for being the focal point of an insider trading ring that generated $10 million in profits.
One way defendants can try to mitigate the punishment is by cooperating with the government. But for Mr. Martoma, the possibility that prosecutors will be willing to make a deal for a lighter sentencing recommendation in exchange for testifying against his old boss is highly unlikely now that he has been convicted.
Even if Mr. Martoma wanted to testify, the circumstances of his dismissal from Harvard would undermine any claim that he is a credible witness after a sudden change of heart. As James B. Stewart pointed out about the possibility of making a deal with prosecutors, “But would anyone believe him?â€
In addition, DealBook reported that Richard Strassberg, Mr. Martoma’s lead defense counsel, said: “We’re very disappointed and we plan to appeal.†That indicates he has no interest in cooperating because that would end any chance of fighting the conviction.
Perhaps the most perplexing question in the case is why Mr. Martoma went to trial rather than making a deal with prosecutors early on. It came out at the trial that an F.B.I. agent had told Dr. Gilman that he and Mr. Martoma were “just a grain of sand†while the real target was Mr. Cohen, so prosecutors would have been quite receptive to what he might have to say.
But there is also the possibility that Mr. Martoma lied to Mr. Cohen by telling him that he obtained the information about the drug trial through proper channels. Or Mr. Martoma didn’t say anything â€" nor did Mr. Cohen ask â€" about whether the information about the failed drug trial was confidential. Except for Mr. Martoma’s word, there doesn’t seem to be a way to prove that Mr. Cohen knowingly traded on inside information as required for an insider trading case.
So it is likely that Mr. Martoma alone will suffer the consequences of receiving confidential information that led SAC to avoid millions of dollars of losses on its investments in Elan and Wyeth. And there is even a chance that Judge Gardephe could accept a recommendation for a punishment that would be the highest ever seen for insider trading.
