It is the most lucrative episode of alleged illegal insider trading ever pursued by U.S. authorities. And it points to one of the most legendary figures in the hedge fund world.
Early Tuesday, federal agents arrested a former trader at a unit of SAC Capital Advisors LP, accusing him of parlaying inside information on a pharmaceutical drug trial into bets worth $276-million (U.S.).
Donald Martoma, the former trader, allegedly executed those trades after consulting with someone identified in the criminal complaint only as "the hedge fund owner." That person is Steven A. Cohen, The Wall Street Journal reported.
Mr. Cohen, 56, is one of the most successful hedge-fund managers in history. He founded his firm in 1992 with assets of $25-million; today, it oversees roughly $14-billion in assets.
In recent years, however, a cloud of suspicion has hovered around Mr. Cohen. A long-running investigation into illegal insider trading uncovered various connections to his business, with five current and former SAC employees facing charges or implicated in illegal activity.
Tuesday's complaint marked the first time that an instance of alleged insider trading has been connected to Mr. Cohen himself. He wasn't charged and has not been accused of any wrongdoing.
"Mr. Cohen and SAC are confident that they have acted appropriately and will continue to co-operate with the government's inquiry," an SAC spokesman said in an e-mailed statement.
Lawyers for Mr. Martoma said in a statement that he was "an exceptional portfolio manager" and maintained he would be exonerated.
For U.S. authorities, the charges are the latest salvo in a continuing campaign against illegal insider trading that has already resulted in scores of convictions against individuals ranging from junior traders to hedge-fund titan Raj Rajaratnam, who was sentenced to 11 years in prison. If charged, Mr. Cohen, however, would represent a target of a different magnitude.
Tuesday's charges describe "insider trading first on the long side, and then on the short side, on a scale that has no historical precedent," Preet Bharara, the top federal prosecutor in New York, said in a statement.
The allegations concern trading that took place in 2008. Mr. Martoma cultivated a relationship with a doctor who was involved in the clinical trial of drug designed to combat Alzheimer's disease, the complaint said.
Mr. Martoma met the doctor through a so-called "expert network" firm. Such companies make money by connecting investors with industry experts, but critics say they allow unscrupulous players to make a grab for confidential data.
That's exactly what Mr. Martoma did, U.S. authorities assert. In July, 2008, he received a presentation from the doctor marked "confidential" that indicated the drug's performance to date in the trial was disappointing, the complaint claimed.
Three days later, Mr. Martoma sent an e-mail saying he had something "important" to discuss with the "hedge fund owner," and the two conferred in a 20-minute phone call, the complaint said. The following day, Mr. Martoma and the hedge fund owner directed a colleague to liquidate the fund's stakes in Elan Corp. and Wyeth LLC, the drug companies involved in the trial, "in a way so as not to alert anyone else, inside or outside" the firm, the complaint said.
By eliminating its holdings and adding short positions – bets that pay off when a stock tumbles – SAC both avoided losses and amassed profits, together worth $276-million, the government said. Elan's share price fell 42 per cent the day after news about the trial became public on July 29, 2008.
Earlier this year, Mr. Cohen gave testimony in an unrelated lawsuit where he described the rules on insider trading as "very vague," and said it was sometimes a "judgment call" when deciding what constitutes insider information, according to documents obtained by Reuters.
With a net worth estimated at $8.8-billion, Mr. Cohen is a formidable investor who has some unusual quirks. To minimize distractions , he reportedly outlawed the bleat of telephone rings (they flash instead).
He lives in Greenwich, Conn., and has a passion for expensive artwork. Earlier he endured a bitter divorce from his first wife, who floated unsubstantiated allegations that he had engaged in improper trading.