Most members of the board had a hard time believing the story. The whole thing struck them as preposterous. Each element was riddled with implausibilities: Changing the grades to impress his parents, spontaneously deciding to come clean with them, leaving the doctored transcript lying around, entrusting his younger brother with the task of assembling the applications. It was one huge “dog ate my homework” excuse.
Martoma also held firm to his defense regarding the timing of the emails and letters he’d sent withdrawing his clerkship applications. He was adamant that he had composed the email to the professor’s secretary, withdrawing his application, the day before Kane had confronted him, on February 1, but that it inexplicably hadn’t been transmitted until the following night, after Kane confronted him. He presented emails with the earlier date on them, even though the recipients’ emails indicated that they’d been received the following day. A computer forensics expert who had been scheduled to appear on Martoma’s behalf backed out, saying that “he did not feel that he was in a position to authenticate Mathew’s version of the events.”
Throughout the process, the board members found Martoma to be evasive and unforthcoming. He was acting guilty.
Some board members were conflicted, because of the great promise Martoma had shown as a student. His academic record was outstanding, and he was heavily involved in law school community activities. But the administrative board concluded that Martoma had presented a cascading series of lies in an attempt to cover his original deception, and on May 12, 1999, they voted to expel him. In its final report, using Martoma’s original last name, the board noted: “Mr. Thomas was apparently under extreme parental pressure to excel academically.”
—
Expulsion did not put an end to Martoma’s Harvard experience. He moved off campus and began plotting ways to get himself reinstated. By his analysis, it all came down to the timing of the emails. If he could convince the law school board that he had withdrawn his clerkship applications before being caught, he would be readmitted and get his life back on course. A light clicked on in his mind: He would create a company to authenticate the disputed dates on the emails.
The scheme seemed brilliant. It would both exonerate him at Harvard and plant the seeds of a new startup company that would ultimately make him rich, too. He would be vindicated on two fronts. He told his parents about his plan, and they agreed to help him. His father took out a second mortgage on their house and lent him a million dollars to launch the company. Martoma was hardly a computer expert, so he had to find someone with technical skills to help him. He quickly settled on the perfect candidate, a talented young programmer named Stephen Chan.
Chan had a great-looking résumé. A couple of years older than Martoma, he had graduated from MIT in 1993 and then gone to work for IBM. He and Martoma immediately got along. Both had excelled in school. Both had immigrant parents with high expectations. And both had a propensity to bend rules, a habit that had recently landed them in serious trouble.
On June 30, 1999, Martoma and Chan’s new company, Computer Data Forensics, issued a four-page report filled with techno-gobbledygook that validated the timeline Martoma had presented to the Harvard board regarding the contested dates on the clerkship emails. “Our conclusion is that the computer data forensics evidence corroborates Mr. Thomas’ assertion that he created the withdrawal letters on January 31, 1999 and sent the subject e-mail…at 10:20 PM the night of Monday, February 1, 1999,” the report read.
It was signed by three “Case Analysts,” notarized and stamped, and mailed off to the Harvard Law School Administrative Board in Cambridge. There was, of course, no mention of the fact that the forensic analysis had been done by Martoma’s own company. Martoma also took a polygraph test, which he allegedly passed. He sent those results to Harvard as well, and waited to hear back.
He eagerly anticipated his vindication, but it never came. The law school declined to reinstate him.
Martoma quickly reoriented his ambition and resolved to try to make a success of his and Chan’s new company. He moved into the apartment complex where Chan lived. They worked out together, took martial arts training five or six days a week, and enrolled in ballroom lessons at the local Arthur Murray Dance Studio, with the aim of impressing women. In September, Martoma asked Chan to sign on as a full partner with the company and promised to pay him $25,000. Four full-time employees were hired in New York—a project manager, an engineer, a quality control specialist, and an administrator. The employees all believed Martoma was a lawyer named “Jay Hale.”
The staff began making preparations for a booth at an upcoming trade show in Las Vegas, but as October came and went, Chan started to wonder about his partner’s background. Martoma had kept details about himself vague and had a habit of deflecting questions. Chan started to get suspicious and wondered whether Martoma was hiding something. He poked around on his own and eventually confronted Martoma about the circumstances of his departure from Harvard and the fact that he had been misrepresenting himself on various company applications and leases with a fake name. Martoma broke down and apologized. He promised never to deceive Chan again. He acknowledged that he had doctored his Harvard transcripts and had lied to cover it up.
While Chan and Martoma bickered, their employees hung around the office surfing the Internet and going out to lunch. “We were like rent-a-friends,” Chuck Clarke, the firm’s “Case Analyst and Project Manager,” later said. He and the other employees figured that “Hale” and Chan were rich kids who didn’t have anything better to do. The company burned through most of the million dollars Martoma’s father had provided in a matter of months, at which point Bobby flew to New York to meet with Chan and Martoma and talk about the business. They asked him for more money to keep the venture going, but Martoma’s father could see that it wasn’t working. He felt his temper rising. He told his son that he was a “complete liability.”
In mid-December, when he should have been halfway through his second year of law school, Martoma boarded a flight and flew back to his parents’ house in Florida. His employees were locked out of the office; their paychecks bounced. The aggrieved employees collaborated on a letter to Martoma’s parents. “His disappearance is unprofessional and bizarre,” they wrote. “The fact that his family is hiding him is incomprehensible and disgraceful. We are owed expense reimbursements. We are owed stock. We are owed bonuses. We are owed commissions.” They threatened legal action if they didn’t receive a satisfactory response. “You have caused us to have an unpleasant Christmas holiday,” they concluded. “If this is the way you treat people, we intend to reciprocate one hundred fold worse.”
While their employees were revolting, the relationship between Martoma and Chan continued to deteriorate, and on January 3, 2000, Martoma filed for a restraining order against Chan. Their heated arguments, he said, had become violent. Chan also, allegedly, called Martoma a “faggot” and “not a man.” Martoma portrayed himself as a battered spouse and said that his parents had intervened to “remove Plaintiff from his relationship with Defendant” after observing the bruises all over his body. Chan refuted these accusations, but the restraining order was granted.
It turned out that Chan had more serious problems than his breakup with Martoma to deal with. A few months before they met, Chan and six partners had been charged with fraud, for allegedly setting up a sham data storage company that stole millions of dollars from various banks. By the time Chan pleaded guilty to one count of conspiracy and one count of mail fraud in the case, Martoma was about to embark on a new life. He had come up with a plan to reinvent himself as a financier.
—
In 2000, Stanford University’s MBA program was vying with Harvard’s for the top business-school ranking in the country and was a favorite recruiting ground for Wall Street banks, consulting firms, and the burgeoning technology giants of Silicon Valley. Martoma had decided to go into finance, and getting an MBA was a crucial first step. Harvard was out of the questi
on, for obvious reasons, so he set his sights on Stanford. The program had a 7 percent admission rate.
Martoma began the process of contacting his old mentors and college professors, asking for letters of recommendation. He wrote to his ethics professor from Duke, Bruce Payne, and asked if he would write a letter on his behalf. Payne had always been fond of Martoma and felt that he was one of the brightest students he’d ever had. He was happy to help.
Payne had already written recommendations for Martoma on two occasions. The first instance was when Martoma applied for a position as a genetics research fellow at the National Institutes of Health, in 1995, the year he graduated from Duke. In that letter, Payne wrote admiringly of Martoma’s scholarship and his passion for ethics, and said: “Mathew would be an asset in any program that suited his talents and interests.” A few months after that, in September, Martoma had asked for another letter, this time for his application to Harvard Law School. Payne pulled the first letter up and changed a few of the details. He had always thought that Martoma would make a superb law student, and he said so.
Since then, Payne hadn’t heard much from Martoma. He assumed that he had finished law school and was working at a prestigious firm somewhere. So when the new request came, in the fall of 2000, for a business school letter, Payne was confused. He asked Martoma to let him know what he’d been doing since he had applied to law school five years earlier, so that he might freshen up the letter. Payne briefly wondered why Martoma would be asking him, rather than some of his law school professors from Harvard, but he brushed the question aside.
Martoma did what came naturally to him: He concocted a story. He said that he had left NIH to start his own business in New York providing biotech companies with corporate infrastructure and 3D computer modeling software. The dotcom boom was under way, and students were dropping out of school to launch startups every day, so it didn’t seem all that unusual. Things had been going great, Martoma told Payne, but then he had had to put his business on hold to move back to Florida to help one of his relatives deal with a health crisis. He did not mention Harvard Law School.
Payne took him at his word and updated the letter, writing about how selfless Martoma was to put his own professional goals aside to return home to support his family and what a serious, earnest student he had been.
The following fall, Martoma arrived at Stanford’s campus south of San Francisco, ready to begin business school. Just days before, he had legally changed his name from Ajai Mathew Mariamdani Thomas to Mathew Martoma. His transformation was complete. Harvard, Chan: It was all behind him. By the time he arrived at Steve Cohen’s office at SAC five years later, he had learned that there was no problem he couldn’t overcome if he put his mind to it.
—
Standing outside Martoma’s Boca Raton house in November 2011, B. J. Kang bent down to make sure that Martoma was okay. He thought about the times in the past when a suspect he approached had fainted. It had happened before. The one notion that kept coming to mind was that an innocent person was unlikely to pass out after hearing the words insider trading.
Just then Rosemary came rushing out of the house, dark hair flying. When she saw her husband on the ground, she screamed.
“Would you like us to call an ambulance?” Kang asked.
“No!” Rosemary sobbed. “I’m a doctor.” She crouched down.
A few minutes later a woozy Martoma pulled himself up off the ground, and Kang continued with what he had to say. “We know about the trade in 2008,” he said.
Martoma and Rosemary looked at each other. They understood immediately what Kang was referring to: Elan, the stock that had changed their lives.
“Your whole life is going to be turned upside down,” Kang went on. He said that he knew Martoma had been involved in insider trading, and then launched into his well-practiced pitch about doing what was right at the darkest time of his life by cooperating. Besides, Kang said, they weren’t really even after Martoma. They knew he was a small, almost insignificant, figure.
“We want Steve Cohen,” Kang said. “You’re in a tough situation, but I’m going to do everything I can to help you out. We are going to do this together. It’s going to be teamwork.”
Kang had done more of these approaches than he could count, and most had been successful. He understood the psychology of this situation, how it affected every part of a person’s life, his family, his children, how it put every bit of security he might have had in doubt. Kang viewed every new cooperator as a partner, someone he would prop up through serious challenges to their mental well-being while they helped the FBI.
Rosemary was shaking. Martoma said that he wanted to be helpful but needed to consult with a lawyer. Kang left feeling confident that they would be working together.
Around 10 P.M., Kang’s partner, Matt Callahan, called Charles Riely, who was at home waiting for news.
“You’re not going to believe this,” Callahan said. “The guy fainted.”
—
By the end of 2011, after five years of issuing subpoenas, flipping cooperators, and wiretapping traders, the Justice Department finally had some tangible victories to show for its investigation of the hedge fund industry. Raj Rajaratnam had been sentenced to eleven years in federal prison. Dozens of other traders and executives had been convicted or pleaded guilty. In spite of all that had been accomplished, though, there was still a sense of frustration among the FBI agents and prosecutors. And that was because they still hadn’t been able to get close to Cohen.
The case against Jonathan Hollander, the CR Intrinsic analyst Dave Makol tried to flip in a Manhattan Whole Foods in January 2009, had not gone forward in the end, much to Makol’s irritation. Hollander had been smart about things. He didn’t take SAC up on its offer of paying for his legal representation, because it struck him as a troubling conflict of interest. Instead, he hired Aitan Goelman, a white collar defense lawyer at Zuckerman Spaeder and one of the best in the business. When it came to dealing with the FBI, he wanted someone who knew exactly who he was working for.
Hollander certainly had the impression that all sorts of inappropriate stuff was going on at SAC. It seemed obvious to him that Cohen was using inside information. But since he wasn’t directly involved in it, he didn’t know the specifics. He met with Makol and the prosecutor Reed Brodsky and told them about a few trades he was aware of that had seemed suspicious. Elan, for one. The word inside SAC was that Cohen had “gotten a call,” and then the firm had gone from being massively long to massively short Elan and had made hundreds of millions of dollars. Everyone on the trading desk was talking about it afterward. Beyond that, though, no one knew what had happened.
Hollander’s career at SAC ended ingloriously. At the end of the summer of 2008, Jason Karp took his whole group for a weekend in Montauk, a surf town at the eastern tip of Long Island. They stayed in a motel together and went deep-sea fishing. Karp shared his plans for the next phase of their careers at SAC. A year earlier, Karp told them, Cohen had promised to spin off Karp’s group, giving them their own capital and separate offices. Karp was done with being part of the high-pressure environment at SAC and expected to have near-total autonomy under the new arrangement. His enthusiasm was inspiring, and Hollander started to feel excited about the idea. Less than three months later, though, in the throes of the financial crisis, Cohen reneged on all the promises he’d made. Hollander and Karp were pushed out.
Even though Hollander was angry about the way he had been treated and had no sense of loyalty to Cohen or Karp or anyone else at SAC, he looked at the risk/reward ratio of the situation with Makol, just as he would with a stock trade. The government didn’t seem to have enough evidence to force him to do anything he didn’t want to do, so why should he cooperate with the FBI?
While the Hollander case was fizzling out, the other investigations leading toward Cohen appeared to be losing momentum as well. Donald Longueuil, the former SAC trader who destroyed his computer hard drives and scattered
them in the backs of New York City garbage trucks, had pleaded guilty to securities fraud, along with his friend Samir Barai, the fund manager who had ordered his analyst to shred all their company’s files. Neither of them had much information that was of use to the FBI in terms of advancing the investigation. The U.S. Attorney’s Office and the SEC were preparing to charge two traders at the hedge funds the FBI raided in 2010 with insider trading: Anthony Chiasson, a portfolio manager at Level Global, and Todd Newman, from Diamondback Capital. But even though both of their funds were filled with former SAC employees, not much evidence implicating Cohen was turning up, and Chiasson and Newman were showing no signs of cooperating. Quite the opposite. They hired some of the top defense lawyers in the country and were fighting vigorously.
In the course of investigating Chiasson and Newman, however, the SEC had made a startling discovery. After going through two million pages of emails, investigators noticed that Jesse Tortora, an analyst who worked for Todd Newman at Diamondback, was emailing details about different companies’ earnings to someone named Jon Horvath at SAC Capital. The SEC investigators, Joseph Sansone, Daniel Marcus, and Matthew Watkins, sent subpoenas requesting Horvath’s emails. One email immediately stood out among the hundreds they got back. It was about Dell.
“I have a 2nd hand read from someone at the company—this is 3rd quarter I have gotten this read from them and it has been very good in the last two quarters. They say GMs [gross margins] miss by 50-80 bps [basis points] due to poor mix, opex in-line and a little revenue upside netting out to an EPS miss.” The message continued: “Please keep to yourself as obviously not well known.”
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