SAC insider convicted

Many on Wall Street have been watching the trial of Matthew Martoma closely. The SAC Capital Advisors trader is looking at 10 years in prison for his conviction on insider trading charges, but most are still waiting to see what will happen to Steven Cohen, his boss.

The Wall Street Journal had this story by Christopher M. Matthews and John Carreyrou:

A jury found Mathew Martoma guilty of insider trading Thursday, handing prosecutors their eighth win against someone who worked at SAC Capital Advisors LP and possibly bolstering a related case against firm founder Steven A. Cohen.

Prosecutors have long pursued Mr. Cohen, who built one of the country’s most successful hedge funds over the past two decades and managed more than $15 billion at the firm’s peak. He has denied involvement in any wrongdoing and hasn’t been charged criminally, but he faces a civil allegation by the Securities and Exchange Commission that he failed to adequately supervise two senior employees at his firm.

Both of those men, Mr. Martoma and Michael Steinberg, have now been convicted on criminal charges. Mr. Martoma, 39 years old, was found guilty Thursday of taking part in what prosecutors say was one of the largest insider-trading schemes ever—illegal trades on two pharmaceutical companies that helped SAC and its traders book profits and avoid losses worth a total of $275 million.

Those dual convictions could hurt Mr. Cohen’s defense. The trades at the heart of Mr. Martoma’s case, for instance, are some of the same ones the SEC cites in its lawsuit against Mr. Cohen.

Alexandra Stevenson and Matthew Goldstein wrote for The New York Times that Cohen continues to conduct business despite the trials of his employees:

For Mr. Cohen, meanwhile, it is business as usual, albeit on a somewhat reduced scale. He is moving ahead with plans to convert his 22-year-old firm into a family office that will manage no outside money, just his $9 billion in personal wealth. The firm will still employ more than 800 people and maintain offices in several cities. At one point during Mr. Martoma’s trial, Mr. Cohen, a noted art collector, attended a New York Knicks basketball game at Madison Square Garden with the art dealer Larry Gagosian.

The case against Mr. Martoma was notable because it was the first time that Mr. Cohen was linked to questionable trades at his firm. The two men had a 20-minute phone conversation on July 20, 2008, the day before SAC began selling two drug stocks. For more than two years, federal prosecutors and agents with the Federal Bureau of Investigation pressed Mr. Martoma to cooperate and tell them what he and Mr. Cohen had discussed.

But with the conviction of Mr. Martoma, an investigation that lasted almost a decade of Mr. Cohen, 57, and his Stamford, Conn., hedge fund may have seen its last criminal prosecution.

When SAC was indicted last summer, federal prosecutors called the onetime $14 billion firm a breeding ground for inside trading activity and a “veritable magnet for market cheaters.” And federal authorities have said they are continuing to investigate accusations of insider trading in several other stocks SAC traded

Reporting on the trial for Reuters, Nate Raymod wrote that Martoma gave little reaction to the verdict:

Martoma gave no apparent reaction as the verdict was read. His wife, Rosemary, sat up in her seat in court as the verdict was read, with tears going down her face. They exited the court holding hands.

As news photographers snapped pictures, Martoma walked stone-faced out of the courthouse and into a waiting SUV with his wife and defense team. They did not speak to reporters.

“We are very disappointed and we plan to appeal,” Richard Strassberg, Martoma’s lawyer, said through a spokesman.

U.S. District Judge Paul Gardephe did not immediately set a sentencing date. Martoma, 39, could face a maximum 45 years in prison, although the highest sentence to date in an insider trading case is 12 years.

But Businessweek’s Sheelah Kolhatka raised several good points about why Martoma didn’t testify against SAC:

But after four weeks of trial, the testimony of two Alzheimer’s doctors and that of drug company executives, traders, compliance officers and academics, two days of jury deliberations, and now a unanimous verdict, a huge unanswered question lingers: Why didn’t Mathew Martoma flip?

Martoma was charged in November 2012 with insider trading in two drug stocks, Elan (PRGO) and Wyeth (PFE), in what the government described as the largest insider trading case in history, with $275 million in profits and avoided losses. Some of the trades at the heart of the case involved Martoma’s former boss, SAC founder Steven Cohen, who, the government alleged, sold off SAC’s position after a 20-minute phone conversation with Martoma that took place on July 20, 2008. No one knows what took place during that phone call, and it’s possible that no one ever will. Cohen himself has not been charged criminally. SAC Capital pled guilty to securities fraud in November. The U.S. Securities and Exchange Commission filed a civil charge against Cohen for failing to supervise his employees that has yet to be resolved.

Government investigators never expected the Martoma case to go to trial. The evidence against him was believed to be so strong, and the potential punishment so steep—up to 20 years in prison—that most observers believed Martoma, father of three young children, would do the rational thing and agree to cooperate in exchange for a reduced sentence. For whatever reason, he didn’t.

For Cohen, long known to be the true target of the government’s investigation, the verdict comes as both a further blow and a relief. Prosecutors managed to shut down his hedge fund, but he has so far avoided time behind bars. It’s Martoma who now awaits sentencing, while Cohen contemplates his future as the head of a multibillion dollar family office and a buyer of high priced art.

And isn’t that really the true injustice? The founder, head and culture-maker of the firm continues to avoid punishment, while those around him continue to fall.