By Bethany McLean
Feb 5 The fate of Mathew Martoma, the former SAC
Capital portfolio manager charged with the biggest insider trade
in history - more than $275 million in profits and avoided
losses, says the government - is now in the hands of a 12-person
jury, which began deliberations in a Manhattan courthouse
But whatever the verdict for Martoma, the trial has been bad
news for someone else: Martoma's former boss, SAC head Steve
Cohen. Given the slow, but relentless, nature of the
government's actions against Cohen, it might be worth
remembering the old adage: It ain't over til it's over.
Cohen has, to date, famously avoided any criminal charges
personally - despite a string of other government actions
against both him and his firm. Last March, SAC agreed to pay
more than $600 million to settle civil insider trading charges,
brought by the Securities and Exchange Commission, involving
Martoma's trade. Then, on July 19, the SEC charged Cohen with
failing to supervise his employees, alleging that he "received
highly suspicious information that should have caused any
reasonable hedge fund manager to investigate the basis for
trades" made by Martoma and another manager.
SAC quickly fired back. A 43-page internal white paper
rebutting the SEC's charges was leaked to the press. In it, SAC
claimed that its compliance efforts were so fantastic that the
SEC was just wrong, wrong, wrong in accusing Cohen of failing to
supervise his employees.
Among other things, the firm's lawyers wrote, "SAC's
compliance team, with Cohen's full support, deploys some of the
most aggressive communications and trading surveillance in the
hedge fund industry." That included a "review of trading made
around market moving events and corporate access events" along
with "regular reviews of the firm's most-profitable trades." SAC
lawyers also asserted, "Cohen has frequently forwarded to
compliance staff communications he receives that caused him
It's long been clear that the government doesn't agree with
that picture of righteousness. The very next day, the Justice
Department filed a criminal case against SAC, though not against
Cohen, alleging that his firm "failed to employ effective
compliance procedures." Prosecutors noted that six former SAC
employees had pled guilty to insider trading, yet SAC's vaunted
compliance department had "contemporaneously identified only a
single instance of suspected insider trading by its employees in
Last fall, SAC paid more than $1 billion to settle the
At that time, there was a lot of commentary, and rage, that
Cohen himself had pretty much walked away. But that was never
If the SEC wins its failure to supervise case against Cohen,
there could be more fines. More importantly, the SEC could try
to limit his ability to be involved with public companies, and
could seek to bar him from managing other people's money for a
long time. In addition, in December, a close Cohen lieutenant
named Michael Steinberg was convicted of insider trading. It is
wrong to think that the feds are done with their investigation
Fast forward to the Martoma trial, which has featured
testimony from current SAC employees, including top traders
Chandler Bocklage and Phillip Villhauer, and Peter Nussbaum, the
longtime general counsel. At times, the thrust of testimony has
veered dangerously toward Cohen - and not in a totally
At one point, Bocklage called Cohen the "greatest trader of
all time," and a defense lawyer began to ask what made Cohen so
great. Judge Paul Gardephe warned, "General questions about how
Steve Cohen conducted his trading I think are very dangerous -
dangerous in the sense that they represent a risk of opening the
door to a broader examination of how Steve Cohen did business."
But more important, Martoma's defense has undercut some of
the assertions in that strident white paper. Martoma is charged
with using inside information to first help SAC amass big
positions in two pharmaceutical companies, Elan and Wyeth,
heading into a big meeting where critical data would be
released, and then persuading Cohen to sell, and also short, the
stocks based on confidential information that the data would be
When SAC sold its shares in Elan and Wyeth, Cohen had the
traders use "dark pools" and algorithms to limit how many people
both inside and outside SAC were aware of the trade. In its
white paper, SAC said that this was a "customary trading
practice" and was "reasonable" - given how leaks about SAC
unloading a large position could cause the stocks to fall.
Those are totally fair points.
But what no one said was that to limit visibility into the
trades even more, they weren't done in Cohen's or Martoma's
account. Instead, Villhauer had the operations people use two
additional accounts that even fewer people could access. The
sales were done there. Later, they were transferred back into
Cohen's and Martoma's accounts.
This does not seem to have been customary.
"Mr. Villhauer," one prosecutor asked, "can you recall
another instance prior to July of 2008 in which the firm sold a
large position using firm accounts and then transferred the
sales later to the accounts that held the long position?" "I
cannot," Villhauer responded. Bocklage also testified that he
did not learn about the sales until afterwards - and said that
he could not recall any equivalent experience during his
decade-plus at SAC.
That's not all. The white paper also claims, "Cohen has
frequently forwarded to compliance staff communications he
receives which cause him concern." Yet on the Elan and Wyeth
trades, it does not appear that Cohen ever sought compliance's
Prosecutor Arlo Devlin-Brown asked Nussbaum, "And compliance
wasn't informed that SAC sold $700 million of Elan and Wyeth in
the week leading up to the ICAD announcement [where the pivotal
data was released], was it?" "Not by a special notice, no,"
Nussbaum answered. He continued, "I don't think they were [aware
of the trades]because nobody came by and mentioned anything."
Devlin-Brown emphasized, "Nobody came by and mentioned
anything?" Answered Nussbaum, "Correct."
From that testimony, it does not appear that SAC's
compliance programs, including surveillance supposed to pick up
SAC's most profitable trades and flag big trades around
market-moving events, picked up on the Elan and Wyeth trades.
Which is shocking, given not just the size of the trades, but
the fact that Elan's shares lost more than 40 percent of their
value after the release of the negative data, and Wyeth's shares
lost 12 percent.
There may be an explanation as to why these huge trades were
missed. But the argument that SAC's compliance regime is so
rigorous that it by definition exonerates Cohen is looking a
little more suspect.
The irony of this is that SAC is paying for Martoma's
defense - standard company policy. Which might be a twist on
another old adage: Be careful what you pay for.