Indian-origin portfolio manager Mathew Martoma faces criminal charges in the United States for illegally obtaining confidential information and using it for making gains in the stock market. But Dr Sidney Gilman, who leaked this confidential information to Martoma and others earning more than $100,000 for his consultations, has got into a “non-prosecution agreement” with a New York Attorney’s office.
Experts say this is in contrast to the famous Rajat Gupta-Raj Rajaratnam case, where both the person who parted with the confidential information and the one who used it for stock market benefits faced criminal charges. While Gupta chose plea-bargaining that ultimately led to criminal prosecution, Dr Gilman’s deal by definition excludes any prosecution.
This is because unlike in Gupta’s case prosecutors do not have wiretaps to establish the communication between Gilman and Mathew Martoma. On the other hand, they are relying on Dr Gilman’s submissions to prosecute Matoma and his fund CR Intrinsic Investors LLC.
According to SEC litigation release last week, “Dr. Gilman, who lives in Ann Arbor, Michigan, where he works as a medical school professor, has agreed to settle the SEC's charges and cooperate in this action and related SEC investigations. In a parallel action, the U.S. Attorney's Office for the Southern District of New York today announced criminal charges against Martoma and a non-prosecution agreement with Dr. Gilman.”
Martoma, who lives with wife Rosemary in picturesque Boca Raton in Palm Beach County, Florida, allegedly illegally obtained confidential details about the clinical trial from Dr. Gilman, who served as chairman of the safety monitoring committee overseeing a clinical trial for an Alzheimer’s drug called Bapineuzumab (Bapi).
Dr. Gilman was selected by Elan Corporation and Wyeth to present the final drug trial results to the public.
“In phone calls that were arranged by a New York-based expert network firm for which he moonlighted as a medical consultant, Dr. Gilman 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. Martoma then caused several hedge funds to sell more than $960 million in Elan and Wyeth securities in just over a week,” SEC said in its litigation release.
According to the SEC's complaint filed in federal court in Manhattan, Martoma first met Dr. Gilman through paid consultations arranged by the expert network firm. Dr. Gilman provided Martoma with material nonpublic information concerning the Phase II trial of bapi. They coordinated their expert network consultations around scheduled safety monitoring committee meetings, and during their phone calls they discussed PowerPoint presentations made during the meetings and Dr. Gilman provided Martoma with his perspective on the results. Dr. Gilman developed a personal relationship with Martoma, eventually coming to view Martoma as a friend and pupil.
The SEC alleged that Martoma caused hedge funds managed by CR Intrinsic as well as hedge funds managed by an affiliated investment adviser to trade on the negative inside information he received from Dr. Gilman.
Although Elan and Wyeth's shares rose on June 17, 2008, on the public release of top-line results of the Phase II trial, market participants were disappointed by the detailed final results issued on July 29, 2008. Double-digit declines in Elan and Wyeth shares ensued. After Martoma was tipped, the hedge funds not only liquidated their combined long position in Elan and Wyeth of more than $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 $82 million in profits and $194 million in avoided losses for a total of more than $276 million in illicit gains.
According to the SEC's complaint, Martoma received a $9.3 million bonus at the end of 2008 - a significant portion of which was attributable to the illegal profits that the hedge funds managed by CR Intrinsic and the other investment advisory firm had generated in this scheme. Dr. Gilman, who was generally paid $1,000 per hour as a consultant for the expert network firm, received more than $100,000 for his consultations with Martoma and others at the hedge fund advisory firms. Dr. Gilman also received approximately $79,000 from Elan for his consultations concerning bapi in 2007 and 2008.
The SEC's complaint charges each of the defendants with violating Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and seeks 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.
Dr. Gilman has agreed to pay more than $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.