Pressure is mounting at Stamford hedge fund giant SAC Capital Advisors L.P. after a former portfolio manager was arrested in what U.S. Attorney Preet Bharara called “the most lucrative insider trading scheme ever charged.”
While SAC and billionaire founder Steven A. Cohen have yet to be directly implicated by investigators as of Nov. 28, the hedge fund reportedly received a Wells Notice – which typically precedes enforcement actions – from the U.S. Securities and Exchange Commission (SEC), according to published reports.
Mathew Martoma, a former portfolio manager of SAC subsidiary CR Intrinsic Investors L.L.C., and Sidney Gilman were charged Nov. 20 by the SEC for their alleged roles in a $276 million insider trading scheme involving a clinical trial for an Alzheimer’s drug being jointly developed by Elan Corp. and Wyeth L.L.C.
The SEC alleges that Martoma illegally obtained confidential details about a clinical trial of the drug from Gilman, who served as chairman of the safety monitoring committee overseeing the trial.
According to the SEC, Gilman tipped Martoma with safety data and details about negative trial results about two weeks prior to their being made public in July 2008, which the SEC alleges resulted in Martoma causing several hedge funds to sell more than $960 million in Elan and Wyeth securities in just over a week’s time.
SAC held a conference call with investors a week after the charges were filed, during which Tom Conheeney, the firm’s president, was reported to have reassured investors that the firm acted appropriately when it traded shares of Elan and Wyeth in 2008.
An SAC spokesperson did not respond to calls for comment.
Martoma has also been charged by the Manhattan U.S. Attorney’s office with conspiracy to commit securities fraud.
“As alleged, by cultivating and corrupting a doctor with access to secret drug data, Mathew Martoma and his hedge fund benefited from what might be the most lucrative inside tip of all time,” Bharara said in a statement following the charges.
Marci Rossell, senior economic advisor for Delphin Investments, a small Stamford hedge fund that has no affiliation to SAC, said there is a fine line between regulation and over-regulation.
“Without regulations, you’ve got this massive trust issue that would have to be overcome,” Rossell said. “Without regulations, there would be no hedge fund industry, no financial services industry overall because people wouldn’t trust it. … So regulators are doing this sort of tightrope dance where there’s a tension between the need to protect the consumer and the cost of those regulations.”
Rossell said the charges against CR Intrinsic Investors and Martoma show the system is working.
“When I see a case like this, it says to me that the regulatory environment as it stands is actually working,” she said.
She said it is important that the average investor feels the regulatory system is working.
Rossell’s comments echoed those of James Comey Jr., general counsel for Bridgewater Associates and a former deputy U.S. attorney general, who spoke Nov. 9 at the University of Connecticut’s Stamford campus.
Speaking as part of a risk management symposium, Comey said, “You have to care what people think. You don’t need to know whether there is actually an explosion of corporate criminality.”
“If People magazine thinks there’s … something wrong with the system — think that in some way the rich white people get away with it — that matters a great deal to a federal prosecutor,” Comey said at the time.
Rossell said she believes the level of white collar crime has held steady over time, and that it often takes an event such as the financial crisis to expose criminal activity.
“In the post-financial crisis era we can see in the political dialogue across the board that the average person is very distrustful of the financial industry right now,” Rossell said. “If those savers of funds pull their money out of the system, that’s bad for everybody. … Their perception is extremely important from that trust point of view.”