Will Martoma Conviction Bolster Insider Trading Crackdown?

While the Securities and Exchange Commission (SEC) may have a spotty record when it comes to insider trading cases, U.S. Attorney Preet Bharara has an impressive winning streak. He is 79-0 in securing insider-trading convictions over the past four years.

Former hedge fund trader Mathew Martoma is the latest guilty verdict for Bharara, whose other high-profile victories include Galleon Group founder Raj Rajaratnam and former Goldman Sachs director and McKinsey managing director Rajat Gupta.

In the latest case, Martoma was charged with orchestrating a scheme to trade on inside information about Alzheimer drug trials conducted by Elan Corporation and Wyeth Pharmaceuticals, which ultimately led to billion dollars in profits for his employer, SAC capital, and $9 million in bonuses for himself. According to prosecutors, the $276 million insider-trading scheme is the largest to date.

“In the short run, cheating may have been profitable for Martoma, but in the end, it made him a convicted felon, and likely will result in the forfeiture of his illegal windfall and the loss of his liberty,” Bharara said in a statement. Martoma now faces more than ten years in prison after being found guilty of two counts of securities fraud and one count of conspiracy to commit securities fraud.

As previously reported on our Business Law News Blog, SAC Capital already agreed to pay nearly $1.8 billion in penalties to resolve allegations of insider trading. The civil case against SAC’s founder, Steven Cohen, who was once one of the world’s most powerful and successful players in the hedge fund industry, is still ongoing.

While Cohen does not yet face criminal charges, the investigation is still ongoing. At trial, the government’s star witness, Dr. Sidney Gilman, testified that a federal agent told him that he and Martoma were only grains of sand and that prosecutors were “really after a man named Steven A. Cohen.” As the statute of limitations draws near, Bharara will have to decide whether to put his winning record to the ultimate test.

Either way, the message for the rest of the financial industry is clear. Given the intense scrutiny on insider trading by both state and federal authorities, firms should ensure that they have comprehensive policies and procedures in place to monitor trading compliance.

If you have any questions about the latest insider trading conviction or need assistance bolstering your firm’s compliance practices, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work.