Circle of Friends

by Charles Gasparino

  Wadhwa had just gotten married; a child was on the way. What’s more, he didn’t have the manpower to take his investigators off the Galleon case so he decided to work a little longer and harder because he loved the thrill of the chase. And based on what he was seeing, he was now in the midst of chasing Steve Cohen.

  Wadhwa reasoned, the SAC portfolio manager must be someone Steve Cohen trusted. The long positions in Elan and Wyeth were really long—often above $300 million through most of 2007 and into 2008. Then sometime in late July 2008, they suddenly exploded to more than $700 million.

  And then just as suddenly—they vanished. Wadhwa had looked at lots of trading records during the inquiry, but nothing stood out quite like this one. From July 21 through 25, SAC began unloading shares en masse—a massive directional shift, described by the senior trader at SAC as “executed quietly and effectively over a four-day period through algos and dark pools.”

  That wasn’t all. SAC began shorting shares on July 28 and July 29—perfectly timed to news delivered at the International Conference on Alzheimer’s Disease, a medical conference in Chicago that was being closely followed by the Wall Street trading community. At the conference, the expert on Alzheimer’s, Sidney Gilman, reported that a drug called bapineuzumab that Elan and Wyeth had jointly developed to treat the disease had failed in clinical trials.

  But that bad news was good news at SAC—yet another perfectly timed trade that produced profits and avoided losses of $276 million as shares of Elan and Wyeth tanked 42 percent and 12 percent respectively.

  More than a year had passed before Wadhwa and his counterparts in the Justice Department could fully appreciate what they had stumbled upon. Of course, with the Galleon case and those that flowed from it, they had other matters to attend to. But by early 2012, the general feeling inside the government team was that these drug trades might be their best shot at making a case against SAC and possibly Cohen himself.

  It wasn’t easy identifying the man directly behind all this good fortune as Mathew Martoma, a former SAC portfolio manager, because of the sheer volume of buying and selling of stocks SAC does, and also because of the way SAC keeps its trading records.

  But when they did, the case started to come together as Wadhwa and Kang began piecing together trades with telephone records and emails into what they believed was a coherent insider-trading narrative that involved Cohen directly.

  What struck investigators as odd was that Martoma was hardly a seasoned hand at SAC. He had gone to law school, dropped out, and then graduated from Stanford University with an MBA. From his bio, he seemed nerdy and smart. He had an interest in medicine, particularly medical ethics. But they didn’t think he was the type of guy Cohen would naturally trust. He was just thirty-four years old at the time and had been at the firm just a little more than a year. He had only been trading for about five years, far less time than the handful of SAC traders whom Cohen considered his closest advisers.

  Wadhwa and Kang believed the emails provided the clue as to why a near novice had so much conviction. Martoma had an important, possibly unimpeachable, source at Elan; it was Gilman—the very same expert who announced the drug’s poor test results at the medical conference. Gilman was a well-known physician from the University of Michigan who also moonlighted in several other capacities. For one thing, he was a consultant to Elan on bapineuzumab, so he would have firsthand knowledge of the research on the drug’s prospects.

  As a side job to his university gig, Gilman also did a lot of work for the pharmaceutical industry advising on drugs and various neurodegenerative diseases. He had earned millions of dollars in this capacity since at least the 1960s, when he also began advising traders and investors on drug company stocks. Since at least 2006, he was part of the Gerson Lehrman expert network, and it was around that time that he had begun advising Martoma at SAC at the price of $1,000 an hour, Wadhwa discovered.

  Based on telephone records, the two spent a lot of time talking, particularly leading up to the Chicago conference on Alzheimer’s where the findings of the Stage II clinical trial of the drug would be released by Gilman himself. It would be a critical date for shareholders of Elan and Wyeth; depending on the outcome, investors could lose or make millions.

  Martoma had a forty-five-minute telephone call with Gilman on July 17—just days before the stock selling began. Later it would be revealed why they had such a lengthy conversation: Gilman had shown Martoma a confidential slide presentation revealing that the Alzheimer drug had flunked its Stage II trial.

  The money shot, however, came when Wadhwa discovered that on July 20, Cohen had a twenty-minute telephone call with Martoma. Records showed the call went down on a Sunday—just hours before the stock selling began and just days before Gilman made the official public presentation that tanked shares of Elan and Wyeth and led to investors, except for SAC, losing millions of dollars.

  Wadhwa had a visceral reaction when he first saw the twenty-minute call between Martoma and Cohen, the multibillionaire hedge-fund founder. Wadhwa wondered aloud: “Okay, you’re a thirty-four-year-old guy, not a lot of experience, and you’re telling Steve Cohen he needs to change the direction of a trade in a big way. Maybe he trusts your judgment or maybe he says ‘tell me why.’ I’d say it’s the latter.”

  Even more suspicious: The call was preceded by an email to Cohen in which Martoma urged a meeting to discuss something “important.” It’s unclear exactly what was said that day, but the email exchanges combined with other evidence painted to investigators a negative view of the drug’s prospects. Martoma believed that SAC should begin reversing its position immediately. One piece of evidence also confirmed how certain Martoma was about his call, according to a senior investigator. Martoma labeled his sale a “level nine” conviction—a “level ten” being complete certitude in SAC-speak. In other words, he was all but certain he knew which way the shares were headed.

  As Wadhwa added up the trades, he knew the stakes were huge: SAC earned profits (on various short positions in the stocks) and avoided losses (by liquidating its long positions) totaling $275 million. He had just stumbled on possibly the biggest insider case ever—certainly far bigger than what the government nailed Rajaratnam on, and one dwarfing the insider trading gains by the likes of Ivan Boesky, Marty Siegel, and Dennis Levine.

  In late summer of 2011, everyone from Wadhwa at the SEC to officials at the Justice Department and the FBI knew what they were sitting on: possibly their best chance to harpoon the whale of Stamford. Wadhwa had assigned two of his best enforcement agents to the investigation with specific expertise in making cases through shoe-leather detective work such as chasing document trails, emails and trading records.

  Wiretaps wouldn’t be useful since Martoma had been fired from SAC in 2010 for poor performance, after cashing out with a $9.3 million bonus for his work on the Elan/Wyeth trades.

  When the trades had run their course, so had Martoma’s career at SAC. He was described by one supervisor as a “one-trick pony” before being shown the door. But the money had bought Martoma the good life. He was now by all appearances a happily married stay-at-home dad, living with his wife, a pediatrician, and their three children in an exclusive enclave in Boca Raton, Florida.

  Kang and the representative from the Southern District, Assistant U.S. Attorney Josh Klein, and Wadhwa met for a final time in October 2011 to determine their next step. There was unanimity that the case against Martoma was solid, and just as solid against Gilman, an eighty-year-old physician with both a world-class reputation and what they believed was the willingness to risk it all for a few bucks. Friends of Gilman saw his involvement as less a product of greed and more of a seduction by Martoma. Gilman had lost a son, and Martoma filled that void. Regulators described the relationship, at least from Gilman’s standpoint, as “friend and pupil.”

  Even so, the inquiry also showed how easy it was for members of expert networks to be corrupted. Gerson had a pretty clean record even though government inve
stigators had heard allegations that its experts, like those at Primary Global, had often sold inside information to traders. Those allegations were made as far back as 2006, when Canadian pharmaceutical company Biovail filed a civil case against SAC and Cohen that was later dismissed.

  Michael Bowe, Biovail’s attorney, made sure Kang was fully briefed on Gerson’s alleged dealings with SAC and other hedge funds. The civil fraud case filed by Biovail against Cohen and other hedge fund managers (and later dismissed) for alleged stock manipulation named Gerson Lehrman as a defendant, and it made some pretty startling accusations.

  Gerson, the lawsuit stated, had a reputation for matching doctors with hedge fund managers to provide nonpublic data on clinical trials. The firm’s experts, Bowe claimed, provided their Wall Street clients with inside information about which drugs would receive FDA approval and which would not. This was actionable information, or as Bowe charged in the lawsuit, the stuff hedge funds like SAC would use “in their trading strategies in that company’s stock.”

  Gerson vehemently denied the charges. Government investigators, meanwhile, believed Gerson was no Primary Global, which they viewed as a corrupt outfit. By contrast, at Gerson experts were explicitly forbidden to discuss confidential information with their clients, and this included information that didn’t even fall within the sphere of illegal inside tips. Experts received compliance training, and their work was constantly logged by company officials.

  In fact, other than the dismissed Biovail claim, there was nothing to implicate Gerson in wrongdoing. Yet, there was something disquieting about the way Gilman, a Gerson expert, had sidestepped Gerson’s controls as easily as Martoma had sidestepped SAC’s.

  So far, not a single Gerson expert had been charged as the investigation entered its seventh year, but that was about to change.

  As convincing as the case was against Gilman and Martoma, investigators believed they needed something more if they were going to charge Cohen. Even if Martoma had a near-certain “level-nine” conviction on the trading strategy—code language that sounded suspicious—it wouldn’t hold up in front of a jury as proof that Cohen had agreed to trade on illegal information. Their best hope would be Martoma telling the feds exactly what had been said during that twenty-minute telephone call before Cohen gave the order to sell hundreds of millions of dollars of stock.

  And their guess was that it had little to do with conviction levels and more to do with how Martoma knew so much about how the stock was going to trade. But they couldn’t charge Cohen on guesswork. For that they needed Martoma to cooperate, and who better to explain his limited options than Special Agent B. J. Kang?

  Kang made the approach accompanied by Matthew Callahan, the new special agent in charge of the FBI’s end of the investigation. The surprise visit to Martoma’s $2 million home in Boca Raton occurred in late November 2011. According to sources, Callahan did much of the talking. (Kang was about to be promoted out of the investigation.)

  It began with the agents asking Martoma to step outside so they could introduce themselves. If Martoma was stunned, he didn’t show it just yet. He invited the agents into his home, and now accompanied by his wife, Martoma listened intently as the agents explained why they thought he was a crook. They said they knew about his use of Gilman as an expert, and they had evidence that he and SAC traded on inside information—a fact now backed up by Gilman, who had agreed to cooperate.

  More than anything, they pressed Martoma on the hopelessness of his situation, before offering the carrot: He could avoid going to jail for a long time—around twenty years—if he cooperated in delivering evidence against Cohen, particularly about what was said during that suspicious telephone call prior to SAC selling all that stock.

  The meeting lasted for forty-five minutes. As usual, the agents had prepared for a wide variety of reactions. Martoma was said to show little if any emotion, except for a period near the end of the meeting when he suddenly got dizzy and fainted. After he regained his composure, the thirty-eight-year-old ex-SAC trader said, “I need to call my lawyer,” and several minutes later the meeting ended.

  Over the next year, Martoma would reject several requests by the government to cooperate. He hired veteran white-collar attorney Charles Stillman and entered into a joint defense agreement with SAC. The choice of Stillman surprised prosecutors because he runs a fairly small law firm (albeit one that has been at the center of many white-collar cases over the years), because of his age (Stillman is 75), and because they thought a firm like SAC, flush with cash, could turn to a higher profile attorney in such an important matter.

  Bharara, for example, did some research on Stillman’s legal career, and he broke down in laughter when he discovered a news story recounting that Stillman had once defended an investment banker who plead guilty to a misdemeanor for threatening a flight attendant and defecating on a food cart. The part that caught Bharara’s eye: When Stillman called his client a “marvelously decent human being who had flown more than 5 million miles before the October flight without any incidents.”

  Martoma was deposed in early 2012 by the SEC and asserted his Fifth Amendment right against self-incrimination. Cohen was deposed in mid-2012, and among the trades he was asked about were those made in shares of Elan and Wyeth. It’s unclear exactly how he answered the questions, or if his appearance advanced the government’s probe.

  People who know about the deposition said Cohen didn’t recall much about the trades in question, which his defenders say is completely understandable. The trades occurred nearly five years earlier and Cohen is a busy guy trading so many different stocks each day that it’s hard to keep track of them all. And above all, these people say he’s innocent. The government has searched all his electronic communications and even his tax returns and has found nothing incriminating, they say. SAC may play rough in the markets, but Cohen is smart enough never to cross the line.

  Esteemed Dr. Gilman, on the other hand, recalled a lot, and led investigators through the maze of emails, instant messages, and telephone calls he had had with Martoma around the trading in question. He participated in several meetings with the FBI and Justice Department before the famed physician formally agreed to become the latest “cooperating witness” in the probe. Gilman may have been a rat, but it was worth it from his standpoint—and the government’s as well. His cooperation, crafted by the criminal defense attorney Marc Mukasey, included a blanket “non-prosecution” agreement, which meant he wouldn’t spend a day in jail for his tell-all on Martoma.

  It was indeed a surprise—a November surprise—when the FBI, federal prosecutors for the Southern District of New York, and the SEC announced that criminal and civil insider trading charges would be brought against Mathew Martoma in what was described as the biggest insider trading case in history.

  With the help of Gilman, the feds laid out a pretty compelling argument for Martoma’s guilt, with specifics about meetings and telephone calls around trading in shares of Elan and Wyeth. They also finally put to rest any doubt about their overarching goal.

  In the charging documents, Cohen wasn’t cited by name, rather he was referred to alternately as “Portfolio Manager A” and the hedge fund “owner” who was on the receiving end of Martoma’s allegedly illegal tips.

  Stevie, you’re the John Gotti of Wall Street,” Bo Dietl blurted out as he sat across from Cohen for dinner at the upscale Greek eatery Milos in Midtown Manhattan.

  Cohen was dressed as he usually is when dining, even at some of New York’s top restaurants: casually, in a sweater, khakis, and sneakers even if his entrance was far less casual. He pulled up at the restaurant in a chauffeur-driven Maybach, which depending on the level of luxury (Cohen’s is custom made) can cost upward of $1 million.

  As the government’s probe intensified, Dietl had become a close friend and sounding board for Cohen, who was increasingly having to defend his business practices. The former New York City detective also knew what it was like to be the focus of suspicion;
two years earlier a former associate of the real Gotti turned informant alleged that Dietl was once on the crime family’s payroll—something Dietl vigorously denied. The allegation was never substantiated and charges were never filed, but the taint remained.

  During their dinner, Cohen had been complaining about the taint now surrounding him and his firm, and how unfair some members of the press had been. Dietl was explaining to him the reality of his situation. Reporters were merely doing their job reporting what the government thinks. With that, Cohen just smiled, Dietl recalled.

  There wasn’t much smiling inside SAC’s Stamford headquarters. After the charges against Martoma were announced, Cohen held a company-wide meeting where he said he was angered by the actions of a handful of employees, and he reminded his troops that the firm operates in a legal and ethical manner, and would survive.

  Cohen must have known this was the most serious single threat to him and his firm in its twenty-year history. In the past, the flacks at Sard Verbinnen would dismiss charges against former SACers like Freeman or Hollander as nothing more than the transgressions of a few wayward souls who were later fired because they couldn’t make the cut at the New York Yankees of the hedge fund world.

  But that strategy wouldn’t work with Martoma. Like those before, Martoma had eventually been fired for poor performance, but only after his highly lucrative, albeit suspicious, trades, and after sharing the wealth at the big hedge fund.

  The SEC was now piling on, too, by issuing a “Wells Notice” against SAC, meaning its enforcement staff had recommended to the full commission that they file charges against the firm for civil securities fraud for allowing Martoma’s illegal activities to take place and benefiting from them. The civil fraud charge wouldn’t put people in jail, or even close the firm, but it was a serious black mark. For years, despite all the smoke surrounding its trading practices, SAC had been able to brag that its compliance system had protected the firm itself from serious illegality. No longer.