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The SAC Insider Trading Scandal—Yet Another Domino Falls

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Mathew Martoma, a former SAC Capital Advisors portfolio manager, was convicted today of helping his company earn more than a quarter billion dollars illegally through trades based on material, non-public information about the testing of a potentially promising drug for Alzheimer’s disease. It has been called “The most lucrative inside tip of all time.” You may recall that SAC Capital (the hedge fund of billionaire Steven A. Cohen) faced an unprecedented indictment followed by a guilty plea and a record $1.8 billion fine.

Martoma was found guilty of two counts of securities fraud and conspiracy to commit securities fraud. His sentencing date has not been set. U.S. Attorney Preet Bharara humorously compared Martoma’s actions to buying the answer sheet before an exam.

“As the jury unanimously found, Mathew Martoma cultivated and purchased the confidence of doctors with secret knowledge of an experimental Alzheimer’s drug, and used it to engage in illegal insider trading. In the short run, cheating may have been profitable for Martoma, but in the end, it made him a convicted felon.”

This verdict comes on the heels of the conviction of former SAC Capital portfolio manager Michael Steinberg on insider trading charges. Martoma’s expert network included Sidney Gilman, an 81-year-old former professor of neurology at the University of Michigan Medical School and one of the world’s foremost authorities on Alzheimer’s. Martoma paid Dr. Gilman more than $1 million over several years for his “consultations”. After Gilman showed Martoma some disappointing test results during one of their consultations, Martoma had a 20-minute phone call with Cohen, after which SAC Capital liquidated its long positions in the pharmaceutical companies and even took short positions which resulted in about $275 million dollars of profit when the shares tanked upon public announcement of the test results. Martoma’s reward was a handsome $9.3 million bonus.

Although Cohen has not been criminally charged, the Securities and Exchange Commission has accused him in a civil action of failing to prevent insider trading at his company. A recent PBS Frontline  Documentary, “To Catch a Trader”, covered this story in-depth, and it featured a few minutes of Mr. Cohen’s testimony during his deposition in which he claimed to have a difficult time understanding the SEC rules on insider trading. It was somewhat reminiscent of Bill Clinton’s grand jury testimony when he said, “It depends on what the meaning of the word ‘is’ is.”

At Index Fund Advisors, we have consistently warned investors to stay away from The Sleaziest Show on Earth—hedge funds. Everything we have seen in the ten years since that Forbes article was published reinforces our stance. Lastly, in honor of Mr. Martoma's conviction, we have updated our Hedge Fund Manager Hall of Shame below.