United States District Court, S.D. New York
Decided September 5, 2014
For Mathew Martoma, aka: Sealed Defendant, Defendants: Daniel Prugh Roeser, Larkin M Morton, Richard Mark Strassberg, Goodwin Procter, LLP(NYC), New York, N.Y. USA; Derek A. Cohen, Dorsey & Whitney LLP, New York, N.Y. USA; John Owen Farley, Goodwin Procter, LLP (Boston), Boston, MA USA; Roberto M. Braceras, PRO HAC VICE, Goodwin Procter, LLP (Boston), Boston, MA USA.
For M.D. Sidney Gilman, Interested Party: Jonathan Nassau Halpern, Marc Lee Mukasey, Bracewell & Giuliani, LLP, New York, N.Y. USA; Shannon B. Wolf, Bracewell & Giuliani LLP(Hartford), Hartford, CT USA.
For David E. Kaplan, Roxy D. Sullivan, Lindsey Rankin, Michael S. Allen, Chi-Pin Hsu, Interested Parties: Ethan David Wohl, Wohl & Fruchter LLP, New York, N.Y. USA.
For University of Michigan, Interested Party: Anthony Scott Barkow, Jenner & Block LLP (NYC), New York, N.Y. USA.
MEMORANDUM OPINION & ORDER
Paul G. Gardephe, United States District Judge.
On February 6, 2014 -- after a month-long trial -- a jury convicted Defendant Mathew
Martoma of conspiracy to commit securities fraud, in violation of 18 U.S.C. § 371, and of two substantive counts of securities fraud, in violation of 15 U.S.C. § § 78j(b) and 78ff, 17 C.F.R. § § 240.10b-5 and 240.10b5-2, and 18 U.S.C. § 2. The Superseding Indictment charges that between summer 2006 and July 29, 2008, Martoma caused his employer, the hedge fund S.A.C. Capital Advisors, LLC (" SAC Capital" ), to trade on the basis of material non-public information. (Superseding Indictment (Dkt. No. 61) ¶ ¶ 1, 8, 14) The evidence at trial showed that Martoma obtained material, non-public information from two doctors -- Sidney Gilman and Joel Ross -- about the Phase II clinical trial of bapineuzumab, a drug it was thought might be useful in treating Alzheimer's disease. Elan Corporation, pic (" Elan" ) and Wyeth owned rights to the drug and were responsible for the clinical trial. The charges against Martoma relate to trading in the securities of these companies.
Sentencing is scheduled for September 8, 2014. This opinion addresses Martoma's objections to the calculation of gain under U.S.S.G. § § 2B1.4 and 2B1.1(b) as set forth in the U.S. Probation Office's June 3, 2014 Pre-Sentence Report (" PSR" ).
Between 2006 and 2009, Martoma was employed as a portfolio manager at SAC Capital in Stamford, Connecticut. (Trial Transcript (" Tr." ) 112-13, 117, 2106) Martoma analyzed and researched companies in the healthcare industry, with a focus on pharmaceutical firms. (Tr. 113-14, 2035-36)
As a portfolio manager at SAC Capital in 2008, Martoma was responsible for investing approximately $500 million. (Tr. 114-15,427) The account that Martoma managed was known as the " GEHC" portfolio. (Tr. 118-19, 138, 436) In addition to directing trades in the GEHC portfolio, Martoma made investment recommendations to Steven A. Cohen, the founder and head of SAC Capital, for trading in Cohen's own portfolio -- the " COHE" portfolio. (Tr. 116, 133-36, 171, 427-29, 434-38, 471, 2053, 2555-57) Cohen managed and traded one of the largest portfolios at SAC Capital. (Tr. 116, 428)
The evidence at trial showed that -- during his tenure at SAC Capital -- Martoma spent approximately two years cultivating relationships with two experts and practitioners in the field of Alzheimer's disease: Dr. Sidney Gilman and Dr. Joel Ross. (Tr. 588, 591, 613, 622-23, 626, 633-34, 1241-43, 1390) Pursuant to confidentiality agreements with Elan, both doctors had been given access to confidential information about the Phase II clinical trial of bapineuzumab. (Tr. 285-90, 293, 298-99, 631-32, 1189-90, 1274-76, 1380-81, 1390; GX 6; GX 20) Dr. Gilman served as the chair of the study's Safety Monitoring Committee (" SMC" ), and Dr. Ross was one of the study's principal clinical investigators. (Tr. 566, 1175)
Through expert networking agencies, Martoma arranged numerous consultations with both doctors. (Tr. 557, 1240) Dr. Gilman alone had 43 sessions with Martoma, generally by telephone. (Tr. 1231-32; GX 601) The evidence showed that Dr. Gilman shared with Martoma confidential safety data concerning the bapineuzumab clinical trial. This data was disclosed to Dr. Gilman during SMC meetings, and Dr. Gilman generally shared this information with Martoma the day of the meeting or the next day. (Tr. 1272-76; GX 209; GX 210; GX 211; GX 212; GX 213; GX 601)
During the period that Martoma was obtaining confidential information from Dr. Gilman and Dr. Ross, SAC Capital amassed enormous positions in Elan and
Wyeth securities. (Tr. 124-25, 130, 472-83, 2267; GX 431; GX 436; GX 565-C; GX 1256; GX 1260) Indeed, in the first half of 2008, the largest position in Martoma's GEHC portfolio was in these securities. (Tr. 130, 2077) Other portfolios at SAC Capital -- including Cohen's COHE account -- took large positions in Elan and Wyeth securities based on Martoma's recommendation. (Tr. 133-36, 467-76, 485-87, 2555-57; GX 305; GX 554-A; GX 554-B; GX 554-C; GX 555; GX 556; GX 565-C) The Government's theory at trial was that the doctors' improper disclosures permitted Martoma and SAC Capital to build and maintain these positions, secure in the knowledge that no serious adverse reactions would bring the study to a premature end. (Tr. 2941-43, 2950-60, 3134-35)
In mid-2008, Elan asked Dr. Gilman to present the final results of the 18-month Phase II bapineuzumab trial at the International Conference on Alzheimer's Disease (the " ICAD conference" ), in Chicago, on July 29, 2008. (Trial Tr. 1396) Dr. Gilman was unblinded to these data on July 15 and 16, 2008. (Tr. 1413) Analysis of the final results showed that the drug had not met the study's efficacy endpoints -- i.e., the study's results did not indicate that bapineuzumab was efficacious for the treatment of Alzheimer's disease. (Tr. 692, 703, 1420-23) The data also showed no dose effect (i.e., administering more of the drug did not yield better results for patients), further suggesting a lack of efficacy. Finally, the mental condition of the placebo group in the non-gene carrier cohort had -- for reasons that are not clear -- deteriorated much more quickly than the placebo group in the carrier cohort, suggesting a flaw in the study or in the data. (Tr. 1420-24)
Elan provided the data to Dr. Gilman in the form of a draft PowerPoint presentation for the ICAD conference. Dr. Gilman testified that on July 17, 2008, he went through the data in the PowerPoint slides with Martoma by telephone. (Tr. 1424, 1439) The Government introduced telephone records showing that Dr. Gilman and Martoma had a one-hour and forty-five minute call that evening. (GX 1211)
The evidence further showed that that same day -- July 17, 2008 -- Martoma bought a round-trip ticket on Delta Air Lines for travel between JFK airport in New York and Detroit, Michigan, on Saturday, July 19, 2008. (Tr. 1950, 1952; GX 1307; GX 1308) The testimony of Dr. Gilman and a Detroit cab driver, University of Michigan access card logs, and cell phone tower records show that on Saturday, July 19, 2008, Martoma flew to Detroit and took a cab from the Detroit airport to the University of Michigan's campus in Ann Arbor. (Tr. 1453-56, 1968-69; GX 1210; GX 1307; GX 1400; GX 1401; GX 1402) There, he met with Dr. Gilman, at lunchtime, in Dr. Gilman's office. (Trial Tr. 1453-56) During this meeting, Dr. Gilman showed Martoma the PowerPoint slides containing the efficacy results, and discussed the data with him in detail.
Given that Martoma had studied potential treatments for Alzheimer's disease for more than two years, and had had countless consultations with medical experts, including Dr. Gilman, Dr. Ross, and others (Tr. 177, 588, 591, 601-16, 613, 626, 1235, 1390; GX 601; DX 791; DX 800), a reasonable jury could have concluded that Martoma had -- by that time -- a highly sophisticated understanding of the science
behind bapineuzumab and was well-equipped to understand the practical significance of the clinical trial results. A reasonable jury could likewise have concluded that Martoma recognized that, in light of the bapineuzumab study's final results, it was highly unlikely that the drug would receive U.S. Food & Drug Administration (" FDA" ) approval at any point in the foreseeable future.
After his lunchtime meeting with Dr. Gilman, Martoma flew back to JFK airport that same afternoon. (Tr. 1952-53; GX 1307) The next morning, Sunday, July 20, 2008, he sent an email to the principal of SAC Capital, Steven A. Cohen, asking whether the two could speak by telephone that morning. (GX 459) In the subject line of the email Martoma wrote, " It's important." Telephone records introduced at trial show that the two men had a 20-minute conversation on Sunday, July 20, 2008. (GX 1215) The next day, Monday, July 21, 2008, SAC Capital began selling the approximately $700 million in Elan and Wyeth securities that it was then holding. (Tr. 151-52, 520-22, 2266-67, 2272-75, 2279-80, 2282-93, 2490; GX 431; GX 432; GX 436; GX 554-C; GX 1256; GX 1260) SAC also entered into significant short transactions involving Elan and Wyeth securities. (Tr. 2385, 2387)
The evidence at trial showed that the sale of Elan and Wyeth securities was kept secret at SAC Capital. Martoma did not tell the research analyst (Kathryn Lyndon) and execution trader (Tim Jandovitz) who worked for him that the positions were being sold. Indeed, their computer monitors showed that Martoma's portfolio -- the GEHC portfolio -- was still holding these securities long after they had been sold. (Tr. 150-54, 2068-69, 2075-77) Only Martoma, Cohen, and Cohen's head trader -- Phillip Villhauer -- knew that these huge positions were being sold. (Tr. 2279-80) Longtime employees of SAC, including Chandler Bockledge -- Cohen's " right-hand man" -- testified that SAC had never sold positions in such a secret fashion before. (Tr. 2537, 2562-63, 2566)
On July 29, 2008, Dr. Gilman presented the efficacy results from the Phase II bapineuzumab study to the attendees of the ICAD conference. (Tr. 2381, 2395-96) Dr. Gilman's presentation began at about 5:15 p.m. Eastern Standard Time. (Tr. 2381, 2395-96) Elan's stock price began sliding even before Dr. Gilman had completed his fifteen minute presentation. (Tr. 2381, 2396; GX 1263) By the close of trading on July 30, 2008, Elan's stock had suffered a 42% decline. (Tr. 2379) Wyeth stock dropped about 12% that day. (Tr. 2383)
At trial, FBI Special Agent James Barnacle testified regarding the amount of profits and avoided losses associated with SAC Capital's trading in Elan and Wyeth securities during the week preceding the disclosure of the Phase II final results at the ICAD conference. (Tr. 2337-38) Agent Barnacle concluded that SAC's total profits and avoided losses from these trades amounted to approximately $275 million. (Tr. 2391; GX 1268) Defendant has not disputed this calculation.
The evidence also showed that Martoma received a $9,380,435 bonus from SAC Capital for 2008. (GX 555; GX 556) Several former employees of SAC Capital testified that portfolio managers at the firm received bonuses when Cohen was able to make profitable trades based on their recommendations. (Tr. 116, 429) Moreover, SAC Capital records introduced at trial
show that Martoma's bonus was attributed to trading in Elan and Wyeth securities that took place prior to the public disclosure of the Phase II bapineuzumab study's final results at the ICAD conference. (Tr. 468-94, 2274-75; GX 555; GX 556)
THE PROBATION OFFICE'S SENTENCING GUIDELINES CALCULATIONS
The Probation Office determined that Martoma has a base offense level of 8 under U.S.S.G. § 2B1.4(a), which applies to insider trading. (PSR ¶ 32) The Probation Office then increased Martoma's offense level based on the amount of gain resulting from his offense. See U.S.S.G. § 2B1.4(b)(1). The PSR calculates the gain resulting from Martoma's offense at $285.4 million. (PSR ¶ 33) This figure includes SAC Capital's total profits and avoided losses resulting from Martoma's insider trading -- which ...