A former hedge fund portfolio manager was arrested Tuesday on charges that he helped carry out the most lucrative insider trading scheme in U. S. history, enabling investment advisers and their hedge funds to make more than $276 million in illegal profits.
Mathew Martoma was charged in U.S. District Court in Manhattan with conspiracy to commit securities fraud and two counts of securities fraud in a scheme that stretched from 2006 through July 2008 while he worked for CR Intrinsic Investors LLC of Stamford, Conn.
The FBI said the insider trading scheme developed after Martoma met a doctor in Manhattan involved in an Alzheimer’s disease drug trial in October 2006. The FBI said in a criminal complaint that he later obtained confidential information related to the final results of a drug trial.
The Securities and Exchange Commission filed civil papers in the case against CR Intrinsic Investors, Mathew Martoma and Dr. Sidney Gilman. The civil complaint said the illegal money was earned in July 2008 when various hedge funds traded ahead of a negative public announcement involving the clinical trial results of an Alzheimer drug being jointly developed by Elan Corp. and Wyeth.
The SEC complaint said that Martoma, then a portfolio manager at CR Intrinsic, carried out the scheme with Gilman, a professor of neurology at the University of Michigan Medical School. The SEC said Gilman served as chairman of the Safety Monitoring Committee overseeing the clinical trial and was selected by Elan and Wyeth to present the final clinical trial results at a July 29, 2008 medical conference. Messages left with the University of Michigan Medical School and Gilman were not immediately returned.
The SEC said that leaks by Martoma caused hedge fund portfolios managed by CR Intrinsic as well as hedge fund portfolios managed by an affiliated investment adviser to liquidate their combined long positions in Elan and Wyeth, worth more than $700 million. It said he also caused them to take substantial short positions and to sell more than $960 million in Elan and Wyeth securities in just over a week.
The massive repositioning, the SEC said, allowed CR Intrinsic and various hedge funds to collective reap illicit profits and avoid losses of over $276 million.