SAC Capital Insider Trading The Greed Pales to the Stupidity By:
Bill E. Branscum
Article in Progress : Page published at this point to provide public access to the relevant documents below.
For the moment, my initial comments are as follows:
Martoma is charged with violating 18 U.S.C. 371; 15 U.S.C. 78j(b), 78ff; 17 C.F.R. 240.10b-5, which is Conspiracy to Defraud the United States (Klein Conspiracy) and Securities Fraud.
Essentially, the government alleges:
Martoma met with a doctor in October 2006 involved in drug trials for an Alzheimers treatment drug, Bapi, that Elan and Wyeth developed as joint partners. A year later, he obtained confidential drug test data that was positive AS TO SAFETY.
Prior to the release of the information to the public, the Hedge Fund accumulated a substantial long position in Elan and Wyth based upon Martoma's recommendation, and over the "vocal opposition of others at the Hedge Fund."
The government alleges that the Hedge Fund Owner consistently backed Martoma against the vocal opposition of others at SAC Capital. When the market reacted positively to the initial public release of positive information as related to the safety of Bapi, the Hedge Fund profited.
In July 2008, Martoma obtained the confidential final results, before the information was released to the public at the ICAD announcement.. The final results of the testing were abysmal ... the drug actually made Alzheimers patients consistently worse.
Within days, based upon the confidential results, Martoma spoke to the Hedge Fund Owner where he was employed and, based upon the confidential results, they dumped their entire position in Elan (10.5 million shares) and Wyeth (7 million shares) before those results were made public.
On Sunday, July 27th, 2008, the people involved committed "suicide by email" in the form of a communication from the Senior Trader to the Hedge Fund owner that said:
"We executed a sale of over 10.5 million ELN for (four internal Hedge Fund
account names) at an avg price of 34 .21. This was executed quietly and
effectively over a 4 day period through algos and darkpools and booked into two
firm accounts that have very limited viewing access. This process clearly
stopped leakage of info from either in (or) outside the firm and in my
viewpoint clearly saved us some slippage."
Their greed was only exceeded by their stupidity. They can talk all the "algo" and "dark pool" nonsense they want but nobody can expect to advantageously trade everything they held, representing a huge portion of the total trading volume (20% of Elan and 11% of Wyeth) against the tide, immediately prior to a cataclysmic event, and avoid notice.
When they make it that obvious, nobody would ask, "Did they know?" I think you could call that, "great big flashing red neon sign self-evident." The only question would be, "How did they know?"
It gets worse.
As testimonial to the incredible greed involved, the SAC Capital Hedge Fund not only sold off everything they held in Elan and Wyeth to avoid losses, they also ''shorted'' the stocks of Elan and Wyeth effectively betting that the price of the stocks would decrease after the data was made public. The day after the negative data was announced at the ICAD Conference, shares of Elan stock lost approximately 42% of their value and shares of Wyeth stock fell approximately 12%.
The Hedge Fund's combined profits and avoided losses through the sale of Elan and Wyeth stock is estimated to be approximately $276 million.
And it gets worse yet.
The really funny thing is, this SAC Capital cabal of keystone conspirators did the only thing imaginable that they could possibly do to exponentially compound their already remarkable stupidity -- they fired their lynch pin co-conspirator.
In 2010 the Hedge Fund recommended that Martoma be fired, and their WRITTEN recommendation specifically said he appeared to be a, "One trick pony with Elan."
Martoma was, in fact, kicked to the curb ... fired.
The federal sentencing guidelines no longer contain any parole provision. So, a thirty eight year old FORMER employee, who must be bitter and resentful, is now facing the potential to spend most of the rest of the best part of his life in prison, unless he "deals" out the people who were above him.
That young man is going to make the best deal he can.