The U.S. Securities and Exchange Commission (SEC) brought its largest ever illegal insider trading case Tuesday, charging a hedge fund manager, and a doctor that tipped him with inside information on clinical trial results, in an alleged US$276 million insider trading action.
The SEC announced that it charged hedge fund advisory firm, CR Intrinsic Investors LLC, and its former portfolio manager, Mathew Martoma, for illegally obtaining inside information from a medical consultant for an expert network firm about a clinical trial for an Alzheimer's drug being jointly developed by two pharmaceutical companies.
The regulator claims that Martoma illegally obtained confidential details about the clinical trial from Dr. Sidney Gilman, who served as chairman of the safety monitoring committee overseeing the trial. Dr. Gilman was selected by Elan Corporation and Wyeth to present the final drug trial results to the public, it says. But, the SEC alleges that he also moonlighted as a consultant to a New York-based expert network firm; and, in that role, tipped Martoma with safety data and eventually details about negative results in the trial about two weeks before they were made public in July 2008.
It says Martoma then caused several hedge funds to sell more than US$960 million in Elan and Wyeth securities in just over a week. The SEC reports that the hedge funds not only liquidated their combined long position in Elan and Wyeth of more than US$700 million, but went on to hold substantial short positions in both securities. "This massive repositioning allowed CR Intrinsic and the affiliated advisory firm to reap approximately US$82 million in profits and US$194 million in avoided losses for a total of more than US$276 million in illicit gains," it says.
The allegations have not been proven. But, Dr. Gilman has agreed to settle the SEC's charges and cooperate in this action and related investigations, the commission reports. And, in a parallel action, the U.S. Attorney's Office for the Southern District of New York also entered a non-prosecution agreement with Gilman, and announced criminal charges against Martoma.
The SEC is seeking a final judgment ordering them to disgorge their ill-gotten gains plus prejudgment interest, ordering them to pay financial penalties, and permanently enjoining them from future violations of these provisions of the federal securities laws.
As part of his settlement, Dr. Gilman has agreed to pay more than US$234,000 in disgorgement and prejudgment interest. He also agreed to a permanent injunction against further violations of the federal securities laws. The proposed settlement is subject to approval by the court, which also will determine at a later date whether any additional financial penalty is appropriate.
"Today's record-setting insider trading case reinforces the cold, hard lesson of so many other recent cases that when you trade on inside information, you're not just betting your money but also your career, your reputation, your financial security, and your liberty," said Robert Khuzami, director of the SEC's Division of Enforcement. "Now, yet another corrupt hedge fund manager has learned the high cost of ignoring that lesson."
U.S. attorney, Preet Bharara, said, "As alleged, by cultivating and corrupting a doctor with access to secret drug data, Mathew Martoma and his hedge fund benefited from what might be the most lucrative inside tip of all time."