DealBook: Martoma Sentenced to 9 Years for 1nsider Trading at SAC

Photo Mathew Martoma, leaving the United States District Court for the Southern District of New York with his wife, Rosemary.Credit Brendan McDermid/Reuters

Updated, 4:52 p.m. |

Mathew Martoma was sentenced to nine years in prison on Monday for carrying out one of the biggest insider trading schemes on record in 2008 when he was working as a portfolio manager at Steven A. Cohen's former hedge fund, SAC Capital Advisors.

The sentence was in line with what the government was seeking. Prosecutors working for Preet Bharara, the United States attorney for the Southern District of New York, had asked for a prison term of eight years or more for Mr. Martoma, who was convicted in February by a federal jury in Manhattan. Mr. Martoma's lawyers had simply asked Judge Paul G. Gardephe to show mercy and sentence him to a significantly shorter term.

In handing down the sentence, Judge Gardephe said, "The sums here are staggering and the size of the punishment must be sufficient to deter others."

Mr. Martoma was also ordered to forfeit a $9.38 million bonus he earned while working at SAC in 2008.

Mr. Martoma was silent during the sentencing hearing. His wife, Rose, seated in the front row, could be seen wiping her eyes at times.

Hours before the sentencing hearing was scheduled to begin in a Lower Manhattan courtroom, Judge Gardephe indicated his thinking about Mr. Martoma's sentence for making illegal trades in shares of two drug companies, Elan and Wyeth.

The judge said in a 25-page decision issued Monday morning that it was appropriate for him to consider all of the $275 million in profits and avoided losses made both by Mr. Martoma and his former boss. Judge Gardephe noted that while prosecutors did not name Mr. Cohen as a co-conspirator, the evidence at trial proved that Mr. Martoma "provided inside information to Cohen and this information was the basis for Mr. Cohen and SAC Capital's subsequent trades in Elan and Wyeth securities."

Mr. Martoma and his lawyer had hoped to exclude Mr. Cohen's substantial trading to limit the amount of prison time he could eligible for under the federal sentencing guidelines.

Mr. Martoma was convicted of using inside information about a clinical trial for an experimental Alzheimer's drug to help SAC make trades in shares of the two drug companies. The trades in Elan and Wyeth — which involved SAC's dumping large positions in both stocks ahead of the release of negative information about the clinical trial — took place over just a few days in July 2008.

Mr. Martoma, who is 40, had said that sentencing him to a long prison term would present an undue hardship on his wife, Rose, a nonpracticing physician, and their three young children. Mr. Martoma and his lawyers had argued that it was unfair for him to receive a long prison sentence for what was essentially a single incident of insider trading.

Prosecutors countered that the number of trades was irrelevant because the improper trading helped SAC generate the $275 million in profits and avoided losses. The authorities also noted in court filings that Mr. Martoma was expelled from Harvard Law School for altering his law school transcript several years before he began working for SAC.

The sentencing of Mr. Martoma closed another chapter in the federal government's investigation into Mr. Cohen and his hedge fund, which lasted for more than seven years. SAC was one of the most successful hedge funds before the firm pleaded guilty to insider trading and was forced by the government to stop managing money for outside investors. Federal prosecutors never charged Mr. Cohen with any wrongdoing, but he still faces a civil regulatory action that could permanently bar him from ever working in the securities industry.

In pleading guilty, SAC paid $1.2 billion in fines and penalties to federal prosecutors. The firm also paid a little more than $600 million in fines and restitution to the Securities and Exchange Commission.

Mr. Martoma is the eighth trader or analyst to work for Mr. Cohen to either be convicted at trial of insider trading or plead guilty to charges of improper trading.

Over the course of Mr. Martoma's trial, Mr. Cohen's name came up frequently during the proceeding even though he never made an appearance. The testimony at trial — some of it provided by some of Mr. Cohen's closest associates at the firm — revealed that Mr. Cohen took great interest in Mr. Martoma's sudden change of heart on the reliability of the experimental drug in July 2008. Mr. Cohen, it was revealed, personally oversaw the trading in both Mr. Martoma's accounts at SAC as well as his own and directed one of the firm's top traders to keep the selling of shares in Wyeth and Elan a secret at the firm.

Mr. Cohen's hands-on attention to Mr. Martoma's trading factored into the last-minute ruling from Judge Gardephe.

Mr. Cohen, 58, has since closed down his hedge fund, which managed more than $14 billion at one point last year, and reconfigured it as a family office that manages about $10 billion of his own money. The new firm, Point72 Asset Management, with about 850 employees, has lost several top employees over the last several months but remains highly profitable.

Mr. Martoma's lawyer, Richard Strassberg, a partner with Goodwin Procter, has indicated his client is likely to appeal his conviction.

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