* Martoma is seventh former SAC employee charged or
* Indictment means he is not likely to be a cooperating
(Updates with details on class action lawsuit against SAC)
NEW YORK, Dec 21 (Reuters) - Federal prosecutors on Friday
lost one opportunity to build a case against hedge fund manager
Steven A. Cohen when a grand jury indicted one of Cohen's former
employees on charges related to an insider trading scheme,
severely reducing the possibility he would cooperate as a
witness against Cohen.
The grand jury in New York returned an indictment against
Mathew Martoma, a former portfolio manager at CR Intrinsic
Investors, one of SAC Capital Management's funds, in what
prosecutors have called the "most lucrative" insider trading
Martoma, 38, of Boca Raton, Florida, was indicted on three
counts of conspiracy to commit securities fraud and securities
fraud related to trades made in Elan Corp Plc
and Wyeth - now part of Pfizer Inc - based on tips
prosecutors say he received from a doctor.
The trades allegedly helped CR Intrinsic avoid losses and
reap profits totaling $276 million in the summer of 2008. The
indictment followed an earlier criminal complaint federal
prosecutors filed Nov. 20.
Martoma is the seventh former employee of Cohen's to be
charged or implicated in insider trading schemes, and the
criminal complaint against him is the first to refer to Cohen.
Cohen appears as "Hedge Fund Owner" in the criminal
complaint and "hedge fund manager A" in the corresponding civil
complaint against Martoma, filed by the U.S. Securities and
Exchange Commission, according to a source familiar with the
"Though disappointing, today's events come as no surprise,"
said Martoma's lawyer, Charles Stillman, founding member of
Stillman Friedman in New York.
"The simple fact is that Mathew Martoma did not trade on
inside information, is innocent of all these charges, and we
look forward to his ultimate vindication."
The same day as the indictment, investors in Elan's American
depositary receipts sued SAC Capital, Cohen and Martoma, among
others, for federal securities law violations related to the
alleged the insider trading.
The lawsuit, filed in the U.S. District Court in New York,
appears to be be the first private action against SAC stemming
from the insider trading criminal case. The lawsuit seeks class
action status and unspecified damages.
After the Federal Bureau of Investigation arrested Martoma
in late November, federal prosecutors filed a criminal complaint
against him but did not formally charge him, a move widely seen
as leaving the door open for Martoma to "flip." Had he flipped,
he would have had to agree to a plea deal in exchange for
becoming a cooperating witness for the government.
"The reports have been that the government has made
significant efforts to enlist Mr. Martoma as a cooperating
witness and he has refused," said Tom Gorman, a partner at
Dorsey & Whitney in Washington.
"The fact that they've incited him probably means that
they've given up on that, but he could still change his mind."
Gorman added defendants often grow more willing to make a
deal as the time of their trial nears.
"The process looks a lot different when you're sitting there
looking at jury selection," he said. "By that time, everybody
starts to get true religion. It's the pressure of the process."
A spokesman for SAC Capital declined to comment for this
story. Spokeswomen for the FBI and for Preet Bharara, U.S.
Attorney for the Southern District of New York, both declined to
The charges against Martoma stem from the U.S. government's
long-running investigation of improper trading in the $2
trillion hedge fund industry.
The investigation has led to more than 50 convictions so far,
most notably that of Galleon founder Raj Rajaratnam and former
Goldman Sachs Group director Rajat Gupta.
Slowly, U.S. authorities have been filing charges and winning
convictions against lower-level traders and analysts who once
worked for Cohen, one of the hedge fund industry's most
successful and best-known traders.
Authorities are stepping up pressure on Cohen and his hedge
fund. This summer, the U.S. Securities and Exchange Commission
took a deposition from Cohen as part of an insider trading
investigation. It is not clear what the SEC asked Cohen.
Recently, a top Cohen deputy, Michael Steinberg, was named as
an unindicted co-conspirator in court documents in a separate
insider trading matter.
The $14 billion SAC Capital, which charges some of the
highest fees in the industry, is up about 10 percent this year -
double the performance of the average U.S. hedge fund.
TIP FROM A DOCTOR
The criminal complaint filed by federal prosecutors and the
SEC's civil suit contend Martoma got insider information from a
doctor who is not named in the criminal complaint because he is
now cooperating with prosecutors after agreeing to pay a
The SEC complaint identifies the doctor as Sidney Gilman, who
once worked as a consultant for a so-called expert network.
Hedge funds use such networks to gain insight into various
Gilman, an 80-year old neurology professor at the University
of Michigan, is serving as a confidential cooperating witness in
the criminal case.
"Dr. Gilman's accomplishments in medical education and
research speak for themselves," said Gilman's lawyer, Mark
Mukasey, a partner at Bracewell & Giuliani. "He has been a
leader in the fight to find a cure for people suffering from
debilitating neurological diseases. Going forward, he will abide
by the terms of his agreements with the US Attorney's Office and
The name of the expert network firm does not appear in the
court documents. A disclosure attached to a paper by Gilman in
the medical journal "Neurology" lists him as a consultant for
the Gerson Lehrman Group.
A GLG spokesman declined to comment.
The court papers describe phone calls in which Gilman shared
detailed information about the Alzheimer's drug's clinical
trial. Gilman was chair of a committee to monitor patients'
safety during the clinical trial.
According to the criminal complaint, Gilman scheduled
meetings and phone calls with Martoma that allowed him to pass
on new information about the clinical trial soon after receiving
it. He was initially positive about the drug; as a result,
Martoma vigorously bought shares of Elan and Wyeth.
The complaint says the hedge fund owner defended Martoma
against other people inside SAC Capital who criticized the large
After Gilman learned the drug trial results were mostly
negative, a trader for CR Intrinsic unwound its positions and
made a move into options that paid off when the stocks fell.
Elan shares, for example, fell about 70 percent following the
news of the trial results.
Of the $276 million in profits, more than $81 million came
from short sales and other options on the two stocks and $194
million came from losses avoided by selling the stocks before
the trial results were revealed to the public, according to the
(Reporting By Emily Flitter and Nate Raymond in New York;
Editing by Nick Zieminski)