U.S. authorities say it was the biggest illegal insider trade in history. Now they must persuade twelve ordinary people to agree with them.
Mathew Martoma, a former portfolio manager for SAC Capital Advisors LP, the hedge-fund firm owned by billionaire Steven A. Cohen, stands accused of parlaying confidential pharmaceutical data into $276-million (U.S.) in illicit profits and avoided losses.
The highly anticipated criminal trial, which opened on Friday in a courtroom in lower Manhattan, is a pivotal moment in the broader crackdown on the use of illicit tips by financial traders.
Prosecutors say that Mr. Martoma, who has pleaded not guilty, called Mr. Cohen shortly after learning a critical piece of secret information; they also allege that the two men discussed the trades in question. Mr. Cohen has not been accused of any wrongdoing.
Last Friday, the prosecution and the defence squared off in opening arguments, presenting starkly contrasting accounts of Mr. Martoma's actions.
Speaking to a courtroom full to capacity, federal prosecutor Arlo Devlin-Brown claimed that Mr. Martoma "corrupted" a respected doctor in order to obtain secret information about a clinical trial of a new drug to combat Alzheimer's disease.
"Ultimately the case is not about scientific testing and it's not about trading," he said. "The case is about cheating."
Richard Strassberg, Mr. Martoma's lawyer, asserted that his client was a hard-working trader who had been falsely accused in a rush to judgment by prosecutors. "There is reasonable doubt everywhere you turn," he said.
The trial took an unexpected turn a day before the opening arguments, when it emerged in court filings that Mr. Martoma was expelled from Harvard Law School for falsifying grades on his transcript. Mr. Martoma's team fought in vain to keep the information secret, arguing that it was "grossly prejudicial" to their client.
In his opening statement, Mr. Strassberg called Mr. Martoma, 39, a "quintessential American success story." He described how Mr. Martoma, the child of immigrants from India, was raised in Florida, attended Duke University and earned a graduate degree in business. He made no reference to Mr. Martoma's time at Harvard.
Mr. Martoma's case is the first one where Mr. Cohen himself played a starring role. Experts say that prosecutors would have attempted to persuade Mr. Martoma to testify against Mr. Cohen in exchange for more lenient treatment, something he has so far refused to do.
"The opportunity to strike a deal technically exists until a sentence is imposed," said Jacob Frenkel of Shulman Rogers and a former federal prosecutor. "As the clock ticks, it becomes less and less likely."
Mr. Frenkel added that because of the revelations about his expulsion from Harvard, Mr. Martoma is unlikely to testify during his trial. Putting him on the witness stand, where he would face questions aimed at undermining his credibility, would be "a desperation move."
The case is the latest to target misconduct at SAC Capital. Last year, the firm itself pleaded guilty to criminal charges of insider trading and agreed to pay a penalty of $1.2-billion. A spokesman for SAC declined to comment on Mr. Martoma's trial.
The trial represents a fresh hurdle for federal prosecutors. So far their record is unblemished: more than seventy convictions and zero acquittals in their five-year assault on insider trading. Last month a jury found Michael Steinberg, another SAC portfolio manager, guilty of criminal insider trading charges, making him the seventh employee of the firm to be convicted.
As in the earlier case against Mr. Steinberg, there are no wiretap recordings or e-mails directly implicating Mr. Martoma, and the charges rest heavily on the testimony of a co-operating witness. That witness is Dr. Sidney Gilman, an 81-year old retired professor of neurology at the University of Michigan, who agreed to testify in exchange for immunity from prosecution.
Dr. Gilman played a key role in a clinical trial of a drug to treat Alzheimer's which was under development by Elan Corp. and Wyeth. In mid-July, 2008, about two weeks before the final results of the trial were made public, Mr. Martoma made a daylong trip to Michigan. There Dr. Gilman shared with Mr. Martoma the still-secret results of the trial, which showed problems with the drug's efficacy, prosecutors allege.
Early the next day, a Sunday, Mr. Martoma sent an e-mail to Mr. Cohen. "Is there a good time to catch up this morning?" he wrote. "It's important." Less than an hour later, the two men spoke for 20 minutes. The following day, SAC began liquidating its entire $700-million position in Elan and Wyeth; it also made a bet those shares would fall. On July 28, the trial results were announced after markets closed. The following day Elan's shares fell 42 per cent.