Hedge Fund Heavy Steve Cohen Implicated in Massive Insider Trading Scheme

November 20, 2012 1:44 PM EST
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Hedge fund manger Steven Cohen is having a bad day.

The SEC charged CR Intrinsic Investors LLC, a unit of Cohen's SAC Capital hedge fund, and former portfolio manager Mathew Martoma for their roles in a $276 million insider trading scheme involving a clinical trial for an Alzheimer's drug being jointly developed by Elan (NYSE: ELN) and Wyeth.

While Mr. Cohen was not named or charged, he was implicated in the trading scheme.

The SEC alleges that Mr. Martoma illegally obtained confidential details about the clinical trial from Dr. Sidney Gilman, who served as chairman of the safety monitoring committee overseeing the trial. In phone calls that were arranged by a New York-based expert network firm for which he moonlighted as a medical consultant, Dr. Gilman tipped Martoma with safety data and eventually details about negative results in the trial about two weeks before they were made public in July 2008.

After Martoma was tipped, the hedge funds not only liquidated their combined long position in Elan and Wyeth of more than $700 million, but went on to hold substantial short positions in both securities. This massive repositioning allowed CR Intrinsic and the affiliated advisory firm to reap approximately $82 million in profits and $194 million in avoided losses for a total of more than $276 million in illicit gains.

Martoma received a $9.3 million bonus at the end of 2008. He worked at CR Intrinsic until 2010 when he was let go for poor performance.

Mr. Cohen, while not named, is refereed to as "Portfolio Manager A" in the complaint, who the SEC said "collaborated closely with Martoma in making the trading decisions."

From the complaint:
On the morning of Sunday, July 20, 2008, following his July 17 and 18 calls with Gilman, Martoma sought to speak with Portfolio Manager A about the Elan positions that the CR Intrinsic and Investment Adviser A portfolios had amassed to that point, telling Portfolio Manager A by email that "[i]t's important" that they speak. Martoma and Portfolio Manager A thereafter spoke for nearly 20 minutes. Martoma indicated to Portfolio Manager A that Martoma was no longer "comfortable" with the Elan investments held by the CR Intrinsic and Investment Adviser A portfolios.

After that call, the firm went from being long over 10.5 million shares of Elan and over 7.1 million shares of Wyeth to being short 4.5 million shares of Elan and 3.3 million shares of Wyeth prior to the July 29th announcement from the company.

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