Inside Trading

Feds Hope to Use Former Underling to Land Hedge Fund Trader Steven Cohen

The government is trying to persuade former SAC employee Mathew Martoma to turn against his ex-boss in a $267 million insider-trading case involving an Alzheimer’s drug. So far Martoma is not playing ball—and both men insist they are innocent. Plus, read Daniel Gross on the insider trading cloud.

Andrew Gombert / Landov

If John Gotti was the Teflon Don, then in the off-the-record view of the FBI and prosecutors, Steven Cohen is the Teflon Trader, where the feds never have enough to charge him with anything even as underling after underling at his hedge fund gets locked up for insider trading—five in all, three of them pleading guilty, two others acknowledging complicity, none of them implicating Cohen personally.

On his part, Cohen says he has never been charged simply because he has committed no crimes. The government is convinced it merely has never been able to catch him—until now, perhaps.

The government finally was able to put the mob boss Gotti in prison when Sammy “the Bull” Gravano turned rat. It now hopes to lock up the hedge-fund billionaire Cohen by persuading his former employee, Mathew Martoma, to do the same and “flip.”

After a Thanksgiving weekend where much of what gave Martoma cause for thanks suddenly was also what he stands to lose if convicted, the 38-year-old arrived in Manhattan federal court Monday morning as the defendant the government most wants to turn rat.

Martoma faces up to 20 years on a charge of using inside information about an Alzheimer’s Disease drug to perpetrate a $267 million insider-trading scheme—the biggest ever. Even so, he shows no sign that he intends to become the Gravano of finance. Like Cohen he maintains through his lawyers that he is innocent of any crimes. He has yet to enter a formal plea, and his attorneys offered no comment yesterday. They have previously insisted he is guilty of nothing more illegal than doing great research.

Martoma was awarded a $9.8 million bonus by Cohen’s firm, SAC, in 2008 for his part in the alleged scheme, but he was fired two years later for being what a company email described as a “one trick pony,” supposedly because he failed to provide any other hot stock information. The dismissal would not seem to necessarily foster great loyalty to Cohen or SAC.

Perhaps Martoma simply thought the government did not have a case against him when FBI agent Matthew Callahan appeared at his $1.9 million home in Boca Raton, Fla., last year and urged him to cooperate and work against his former boss.

It seems that only after Callahan returned with an arrest warrant at 6:30 a.m. last Tuesday did Martoma learn just how strong a case the government apparently had. Dr. Sidney Gilman, the 80-year-old physician who allegedly provided confidential information about clinical trials of the Alzheimer’s disease drug, had agreed to cooperate in exchange for escaping prosecution. Unless Gilman himself develops Alzheimer’s, Martoma could well be forced to make an unfortunate addition to his tip-top educational resume:• Duke (summa cum laude) • Harvard Law • Stanford Business School• Federal prison

Martoma was brought before a federal magistrate in Florida and freed on $5 million bond co-signed by his in-laws pending transfer of the case to New York. He returned home in time to have Thanksgiving dinner amid what otherwise would have seemed uncommonly good fortune.

Martoma’s wife, the mother of their three young children, was at his side as he went to his arraignment on the fifth floor of Manhattan federal court after 10 a.m. Monday. Dr. Rosemary Martoma is a highly regarded pediatrician and by all appearances a steadfast spouse. She also is a snappy dresser, clad on Monday in a blue silken blouse, snug tan skirt, and high-heeled black shoes that looked to be made by a designer only a sophisticate would know.

For his part, Mathew Martoma eschewed the traditional defendant’s dark suit for a hip plaid sports coat, blue V-neck sweater, and brown pants. He is slight of build and has fine features and looks not at all like a guy ready for prison.

Martoma also was accompanied by two defense lawyers, who sat on either side of him in the front spectators’ bench as they all waited for the case to be called. There were a first few, barely visible traces of gray in his close-cropped black hair, which will surely be mostly white if he ends up being convicted and serving anything close to the maximum sentence. His wife sat one lawyer over from him, calm in the way of somebody who routinely treats sick kids.

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Magistrate James Cott had stepped off the bench and a TV reporter came over to chat with the lawyers, joking that maybe the judge was doing some online shopping on this cyber Monday. Mathew Martoma offered the reporter a compliment.

“You do nice work,” he said.

The judge finally took the bench. The clerk called out the case.

U.S. vs. Mathew Martoma.”

Martoma’s name was Ajai Mathew Mariamdani Thomas until 2001, when he followed the example of his father, who had changed his own name from Thomas to Martoma two years before. A more profound change seems to have taken place in the young man who wrote two papers about medical ethics at Harvard Law and served for a time as deputy director of the Office of Genome Ethics at the National Human Genome Research Institute in Bethesda, Md. He then decided to translate his interest in bioscience into profit, proceeding from Stanford Business to a small Boston hedge fund and finally to the monster money machine, Cohen’s SAC, in 2006. SAC has averaged a 30 percent return since it was founded in 1992.

Martoma is the sixth person to be implicated in insider trading while working at SAC, but the first alleged to have done so directly with Cohen, who continues to deny any wrongdoing. Gravano had been so effective against Gotti because of a similar direct connection with an insulated boss. Martoma thus was of particular interest to Agent Callahan and the assistant U.S. attorney, who now sat at the prosecution table. A year after Callahan’s invitation to cooperate, here they were, with Martoma sitting where the government apparently so desperately wishes to put Cohen.

The law required the judge to set the preliminary hearing for 30 days hence: Dec. 26.

“No one’s going to want to be here on Dec. 26,” defense lawyer Charles Stillman noted.

The judge agreed, and it seemed the hearing almost certainly would be rescheduled for sometime in early January. Martoma would be spending two more holidays, Christmas and New Year’s, with the next step of the case looming before him.

At the end of hearing, the judge agreed to a slightly modified version of the $5 million bail set in Florida. He asked Martoma if he understood that he risked arrest if he violated its terms.

“Yes, your honor,” Martoma replied, his voice clear and stronger than his appearance would suggest.

Martoma and the lawyers then returned to the spectators’ bench, where the wife had gathered up their coats.

“The bag lady,” she said, proving she’s still able to joke.

She and her husband took each other’s hands as they left the courtroom and proceeded to the clerk’s office just past the elevators. They stood in front of a Plexiglas partition like that at a bank and signed the papers needed for the modified $5 million bail. They each signed, as they might have at the marriage bureau.

Outside the courthouse, they were swarmed by a media mob until they managed to get into a livery cab.

“Who is that?” a passerby asked.

“A white-collar guy,” a photographer answered.

‘Oh,” the passerby said in a disappointed tone.

Just up Mulberry Street from the courthouse was a shop with a sign reading simply “SHOE” that stocks ultracool footwear such as what Martoma’s wife sported. The shop has the same tile floor as when it was the Ravenite Social Club, headquarters of the Gambino crime family and John Gotti before Gravano turned rat.