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Former SAC Trader Busted With Biggest Insider Trading Profit In History

Tyler Durden's picture





 

Over two years ago, on November 5, 2010, weeks before news broke out that the SEC had caught hedge funds in a massive insider trading scheme involving expert networks, and before the phrase expert network was even mentioned in places away from hedge funds, we wrote an article, titled "Is The SEC's Insider Trading Case Implicating FrontPoint A Sting Operation Aimed At S.A.C. Capital?" that predicted everything that has transpired with SAC since then: we said expert networks would be exposed as the root of virtually all "information arbitrage" alpha by Steve Cohen, more importantly, we exposed various biotech stock trading patterns, where the informational benefits from easily bribable doctors would result in immediate profits courtesy of advance knowledge of Phase 2, 3 and NDA results. Today, we discover not just how deep the SAC insider trading schemes went, but that the profit from such information abuse amounted to hundreds of millions in standalone cases. Adding these together and one can see why Steve Cohen - whose knowledge of these epic inside trading scheme is of course never implied by us: after all, that's what the DOJ, the SEC and the various DA offices are for - was generating 20% returns year after year and able to pocket 3% and 50%.

As a reminder, this is what we wrote, at a time when even suggesting in public that SAC was involved in insider trading was a taboo topic:

[Would] SAC be so kind as to provide the following information:

  1. Did SAC short CYBX in the days immediately preceding the adverse CYBX statement from August 12, 2004. And did it  subsequently go long ahead of the favorable 8K from February 3, 2005. If so, what was the investment thesis/catalyst for such decision. Did SAC consult with an expert network or an outside consultant on any of the trades?
  2. Did SAC go long ITMN in the days immediately preceding the favorable ITMN statement from March 9, 2010. And did it subsequently sell all of its holdings in advance of the adverse news from May 4, 2010. If so, what was the investment thesis/catalyst for such decision. Did SAC consult with an expert network or an outside consultant on any of the trades?
  3. Did SAC sell its 700,000 shares in advance of the adverse MYGN news release from May 4, 2010. And did it subsequently sell all of its holdings in advance of the adverse news from May 5, 2010. If so, what was the investment thesis/catalyst for such a decision. Did SAC consult with an expert network or an outside consultant on any of the trades? Furthermore, what catalyzed the decision to reenter the stock.

Today, one by one all of our questions are being answered, in a way just as had been expected. From the FT:

A former portfolio manager at SAC Capital was arrested and charged with insider trading for allegedly dumping shares of two pharmaceutical companies after learning the results of a secret drug trial and made $276m in profits, in what authorities believe is the most lucrative illegal trading scheme.

 

Agents with the Federal Bureau of Investigation arrested Mathew Martoma early on Tuesday at his Boca Raton, Florida home. Prosecutors with the US attorney’s office in Manhattan, which announced the charges, said it “is believed to be the most lucrative insider trading scheme ever charged, resulting in benefits to the hedge fund of more than a quarter of a billion dollars.”

 

Mr Martoma worked for CR Instrinic, a unit of SAC Capital, the $14bn hedge fund run by Steven Cohen. SAC Capital had no immediate comment. Mr Martoma could not immediately be reached.

 

According to the complaint, Mr Martoma, a trader of pharmaceutical stocks, in October 2007 learnt confidential results of an Alzheimer drug trial conducted by Elan and Wyeth. Mr Martoma was introduced to a doctor, Sidney Gilman, involved in the drug trial the year before through GLG, an expert network firm, which matches money managers with industry experts.

 

On July 17 2008, Mr Martoma allegedly obtained the final disappointing results of the drug trial from Mr Gilman and three days later, according to the complaint allegedly “spoke to the owner” of the hedge fund where he worked and recommended selling Elan and Wyeth before the drug trial results were made public.

 

The next day, according to the complaint, Mr Martoma and the hedge fund owner instructed a trader to sell its entire 10.5m share position in Elan and 7m shares of Wyeth. The hedge fund also placed a bet that the two stocks would drop.

In other words, nothing that was not explicitly known by our readers for over two years. But to summarize, here is how one made millions in the mid-2000s:

  1. Get a job with a prominent hedge fund, but not as an analyst or sub-PM, but must run own pod of between $100 and $200 million of dedicated capital, where no individual stock trading decision has to go through committee. Best places for this have historically been SAC and Millennium.
  2. Get a Gerson-Lehrman or any other expert network subscription; become close friends with all disgruntled "experts" i.e., doctors supervising Phase [x] trials for prominent and one trick pony biotechs, paid $1000/hour for their services.
  3. Ahead of the public announcement (as far as possible to make it seem less shady, but even 24 hours ahead of time works) of drug efficacy, or lack thereof, take out said expert for a night on the town, just so there are no pesky recordable phone lines, whereby 500 freshly printed $100 bills exchange venue from one pocket to another, coupled with a substantial amount of alcohol consumption.If time is of the issue, skip all of the above and merely promise payment by phone in exchange for critical information.
  4. The next morning, using a VWAP algo so it doesn't appear too desperate, or in the worst case some In The Money calls, establish major position in the company whose drug trial will have favorable outcome. Invert for disappointing drug trials.
  5. Wait for news, act surprised, and sell small portion of position. Over next 3-4 weeks sell remainder.
  6. Collect one bonus, and if large enough (>$10 million), take a year off, then reenter work force and find employment with comparable silo-based hedge fund, where PMs have sufficient "independence" so that the head PM: Steve Cohen, Israel Englander, etc., can claim they had no idea what the standalone PMs were doing on their own.
  7. Repeat as necessary and pray 5 year statute on criminal limitations expires fast.
  8. Retire.

This is how it is supposed to work, and has worked for countless "PMs" in the period 2003-2009.

When it doesn't work quite as expected, get a 5 year jail sentence coupled with profit disgorgement, but not before parking $5-10 million in hush money from various "interested party" lawyers, just to keep one's mouth shut before various FBI, SEC, and DA representatives. Park money in Switzerland Singapore. Do 2.5 years on good behavior. Leave prison to $5-10 million in happy retirement money.

The end.

Oh, one more thing:

 SAC still is accountable for 10% of daily NYSE volume, and now that it can no longer capitalize on "expert networks" alpha, is lately best known for running the entire market's stops both up and down (see AAPL yesterday), a feat made possible due to the total collapse in broad institutional volume. Have a wonderful manipulated day.

* * *

Full Martoma filng below:

 

 


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Tue, 11/20/2012 - 13:35 | Link to Comment Captain Benny
Captain Benny's picture

What about Dendreon!?  SAC raided the crap out of DNDN and manipulated it like crazy based on insider information and paying off the FDA.... and still no prosecutions.

Tue, 11/20/2012 - 13:45 | Link to Comment Silver Bug
Silver Bug's picture

Don't worry he'll just get fined for 1/3 of it and continue on making a profit.

 

http://ericsprott.blogspot.ca/

Tue, 11/20/2012 - 14:19 | Link to Comment strannick
strannick's picture

If they wanted 20% a year they shouldve just bought gold

Tue, 11/20/2012 - 14:40 | Link to Comment Vegamma
Vegamma's picture

But much better for SAC to ean 20% on YOUR money. Why put theirs at risk?

Tue, 11/20/2012 - 15:17 | Link to Comment Dr.Awkward
Dr.Awkward's picture

As long as he gets his prescription of Bapineuzumab in jail, he'll manage.

Tue, 11/20/2012 - 14:42 | Link to Comment tickhound
tickhound's picture

I know so many people who bought calls ahead of that move.  Even planners were moving it into their 401k... Seems EVERYONE knew.  "Shhhh, I got a secret, pass it on." - Literally is how it went down for me.  I didn't do it, watched the thing explode up, felt like shit........ then, crash.  Heh. 

That '09 DNDN rocket ship made soooo many instant $millionaires... Then instant bagholders.  Poor bastards. 

Fri, 11/23/2012 - 15:56 | Link to Comment monkeyshine
monkeyshine's picture

It wasn't ''09 but '07 in which the scandal at DNDN occurred. To make a very long story as short but informative as possible, DNDN's drug is a sort of vaccine for prostate cancer. Usually the CDER division of FDA makes decisions on cancer drugs and the players in Connecticut had insiders who knew either how the CDER worked, or how to work it. But when DNDN went up for approval, the FDA gave the decision to the CBER division, the biological division. There was a power play inside FDA that threatened turf. Using great pressure, the head of CDER was able to select 4 of the 18 peopleonto the panel that recommends drugs for approval. Not surprising those 4 voted no, all the others voted yes. On the basis of an overwhelming FDA panel vote in favor of the drug, The stock went from around $2 to over $22 In days. NDuring the next 5 weeks more than the entire float of DNDN went short. Priort to the panel it was already a heavily shorted stock but after the panel it went into overdrive. The shorts had to get back to even at least. There were tens of millions short shares and millions of put contracts opened after that vote. Because of the vote a few funds that were short the $2 and $4 calls into the panel - a foolish move - folded up shop as they had to deliver shares in a market where shares were in great demand (To borrow and short). While wall street went nuts looking for ways to short DNDN around $20 - even Bernie Madoff had 800,000 put contracts open - there was an unprecedented campaign to get the FDA to reject the drug that the panel voted to approve. 3 of the FDA panelists appointed by CDER enmabrked on a major campaign to lobby FDA to reject the drug. 2 of these doctors were involved financially in a competing drug and one statistician was on retainer. Never before had FDA panelists gone to such lengths. Usually the protocol is you vote and win lose or draw you respect the outcome of the vote, but not in this case. Cut tothe chase, 6 weeks later the FDA for the first time ever rejected a drug that a panel had recommended for approval. The big short funds got their money back, and then some.

Tue, 11/20/2012 - 13:38 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

The rot has long since moved from the head to the body. Time for rebirth and regrowth.

<Unfortunately gangrene must first set in before anything will be done by those who have the most to lose.>

Tue, 11/20/2012 - 14:19 | Link to Comment The Master
The Master's picture

Bra-fucking-vo Tylers!

Tue, 11/20/2012 - 14:35 | Link to Comment Widowmaker
Widowmaker's picture

Beheadings.

Shut the fuck up and start.

Tue, 11/20/2012 - 13:38 | Link to Comment JustObserving
JustObserving's picture

Steven A. Cohen is, of course, completely blameless - as pure as Ceasar's wife.  How did he maintain such innocence when surrounded by such corruption? That man deserves a medal or two.

Tue, 11/20/2012 - 14:01 | Link to Comment jcaz
jcaz's picture

Of course- after all, why would a man worth billions risk it all for a couple hundred million?   Oh, cause he's STEVIE COHEN.........

Tue, 11/20/2012 - 13:40 | Link to Comment putaipan
putaipan's picture

nice work if you can take it ....

Tue, 11/20/2012 - 13:42 | Link to Comment williambanzai7
williambanzai7's picture

STEVE COHEN

Tue, 11/20/2012 - 13:48 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Paging Attorney General Eric Holder..........paging Eric Holder.

<Never mind. Wrong puppet.>

AG Eric Holder expected to stay for a year

Tue, 11/20/2012 - 20:36 | Link to Comment Bananamerican
Bananamerican's picture

oh i don't know...

elections over, all that WS money couldn't get Mit over...maybe O has nothing to lose and payback in his heart....

I can dream can't I?

Tue, 11/20/2012 - 13:45 | Link to Comment ebworthen
ebworthen's picture

Just imagine how big the real inside deals are.

This is another "get the guppy" operation; the great white shark insider deals will never see the light of day or prosecution because they involve the TBTF banks (i.e. - our government).

Tue, 11/20/2012 - 13:45 | Link to Comment kikk
kikk's picture

Well well well, dishonest people working in the financial sector. Who would have believed it  ?

Tue, 11/20/2012 - 13:51 | Link to Comment Kaiser Sousa
Kaiser Sousa's picture

BUY MORE STOCKS.....

YOU TOO CAN BECOME RICH LIKE THE INSIDERS....

despite the fact that ur not on the inside....

"It's a big club you aint in it....."

George Carlin

Tue, 11/20/2012 - 13:56 | Link to Comment HD
HD's picture

If only George had lived for just one more HBO special...

 

I can only imagine his final rant to end all rants before dropping dead right on stage just to make his point.

You're missed Mr. Carlin

Tue, 11/20/2012 - 14:23 | Link to Comment Kaiser Sousa
Kaiser Sousa's picture

no doubt...

truly a dying if not already dead breed.....

Tue, 11/20/2012 - 22:56 | Link to Comment monad
monad's picture

George Carlin's best rap: Life Is Worth Losing (apropos subs)

Tue, 11/20/2012 - 13:47 | Link to Comment Darkness
Darkness's picture

This is a great idea. Can anyone look over my resume before I send it to Grandmaster Cohen? Can't wait to start manipulating markets because if you have to play fair, why would anyone want to play at all?

Tue, 11/20/2012 - 14:00 | Link to Comment Skateboarder
Skateboarder's picture

Do you have a masters in Kickbacks?

Tue, 11/20/2012 - 13:55 | Link to Comment slaughterer
slaughterer's picture

Come join the "Steven A. Cohen for Treasury Secretary" campaign on ZH.  

 

Tue, 11/20/2012 - 13:55 | Link to Comment Robslob
Robslob's picture

 

THAT WILL $1 IN FINES MORTIMER!

Tue, 11/20/2012 - 13:57 | Link to Comment Bangin7GramRocks
Bangin7GramRocks's picture

And most of you people held these thieves in the highest regard. I always read the words legendary associated with all of these hedge fund criminals. They are all guilty! Cohen is the Jewish John Gotti. Untouchable. At least the Feds should fuck with him and make him sit through a long trial before a captured jury acquits him.

Tue, 11/20/2012 - 14:40 | Link to Comment Widowmaker
Widowmaker's picture

Make no mistake about it, ZH is chalk full of cock sucking faggots in pinstripes.

You gobblers are all inept to do anything whatsoever except apply for a job.

Poor bastards with a meaningless life ahead of you.

Tue, 11/20/2012 - 15:47 | Link to Comment NotApplicable
NotApplicable's picture

You two should start a club.

Tue, 11/20/2012 - 13:59 | Link to Comment buzzsaw99
buzzsaw99's picture

I'm sure the joo sec will go after the joo sac. HAHAHAHAHAHAHA!!!

Tue, 11/20/2012 - 14:05 | Link to Comment muppet_master
muppet_master's picture

BIG BOYS

don't mess around with stupid ittie bittie biotechs, specially those one trick pony types.  BIG BOYS trade spx futures and currencies (EUR/USD). = less easily MANIPULATABLE and more LIQUID.

by the way, my last post was when spx @ 1354 i said to cover shorts and go long.  its now @ 1387 or so...don't cover yet ok wait for 1460? same with eur shorts, covered my 1.315 shorts @ 1.272...went to 1.268, so what?? its now @ 1.28+

before that I called the TOP day after QE3 spx @ 1474, eur @ 1.315, posted this on ZH in real time...too lazy to post the links..now just riding the longs now.....

anyways, insider trading in little puny instruments (biotechs) should also be PUNISHED SEVERELY

Tue, 11/20/2012 - 14:47 | Link to Comment Aurora Ex Machina
Aurora Ex Machina's picture

This you know, the years travel fast, and time after time I've done the tell, but this ain't one body's tell, it's a tell of us all, and you gotta listen it and 'member, 'cause what you hears today, you gotta tell the newborn tomorrow. I'z looking behind us now, into history back, I sees those of us that got the luck and started the haul for home. And I'z remembers how it lead us here and how we weres heartful 'cause we sing the once was. One look, and we knew we'd got it straight; those who'd gone before had the knowing and the doing and things beyond our reckoning, even beyond our dreams. Time counts, and keeps on counting... But most of all, we remember the man that finded us, he who came the salvage...

 

 

Tue, 11/20/2012 - 14:16 | Link to Comment youngman
youngman's picture

Lets see you have a warehouse full of super computers right next to the DJ Computers so that you get the info in a second or two faster than the average Joe.....and that is not insider trading?????  I want a new drug....

Tue, 11/20/2012 - 14:36 | Link to Comment Aurora Ex Machina
Aurora Ex Machina's picture

Now we're complaining in the open about being Couffabled?

Interesting times.

 

Of course; the real trick is being an Angel to one of the new flight of doves, then calling your trading friend to get booking those restaurant seats and working the angles for a nice IPO ringing....

Tue, 11/20/2012 - 14:37 | Link to Comment robnume
robnume's picture

Title 18 is RICO territory! I've been writing RICO briefs for 5 yrs. now, against everyone from the Fed. Res. System to the U.S. D of Treasury. Cannot file them because I enjoy breathing too much. RICO, RICO, RICO!!!! Won't anyone in power file??? I don't even know why I ask; clearly EVERYBODY in U.S. is in on the kickback, hush money train.

Tue, 11/20/2012 - 15:09 | Link to Comment Aurora Ex Machina
Aurora Ex Machina's picture

Could I calmly suggest that if you've been filling in forms for five years, and not even mailing them anonymously, you start investigating Wikileaks (et al), with a serious mind to security and getting the information out? I'm fairly sure with due diligence you can get that information out into the open (and thus, judgement of the gallery).

 

Otherwise, that's a hell of a waste of time and spleen.

Tue, 11/20/2012 - 15:28 | Link to Comment jayman21
jayman21's picture

Southern District of Manhattan = Kangaroo court

Look up Martin Armstrong's case.

 

 

Tue, 11/20/2012 - 17:15 | Link to Comment poldark
poldark's picture

I just hope we will see the day when these guys get an appointment with Madam Guillotine.

Tue, 11/20/2012 - 17:40 | Link to Comment Venerability
Venerability's picture

Very good and very witty thread.

Perhaps there is hope for ZH after all.

Tue, 11/20/2012 - 17:43 | Link to Comment libertarian_neocon
libertarian_neocon's picture

I think this is the big one.  The insider trading charge that will bring down SAC.  ELN was in the central book, the one run by Stevie Cohen personally.  No way he would have sold so much stock so quickly without knowing the real reason why.  It's not like you could just walk into his office and say "I think you should get out of this huge core position right now"  "why?"  "I just think its overvalued right now".  No way jose, not with data coming in a matter of days.  All it will take is for Mathew to flip.

Tue, 11/20/2012 - 21:57 | Link to Comment synsolve
synsolve's picture

Don't get the orange jumpsuit out just yet. NY State and the Federales had Sandy Weill dead to rights. The Feds (S.E.C.

and "Justice" had ol' "Ned" Johnson of the Fidelity Johnsons between that same rock and a hard place. I don't know what figure

Sandy jotted down on the slip of paper which he slid across the desk, but word in Boston is;  Ned's had 11 digits.

Bank breaker (even for the "Justice" Dept.) and CHECKMATE federales....

Tue, 11/20/2012 - 22:41 | Link to Comment Herdee
Herdee's picture

SAC Capital, I wonder if they bumped into OVERSTOCK.com and Patrick Byrne? Ha,Ha. I can guarantee you that they and the New York Banksters literally hate the videos on DeepCapture.com,And here you thought it was just bad debt that was going to bring down the Banksters?

Tue, 11/20/2012 - 23:16 | Link to Comment Pumpkin
Pumpkin's picture

Who the hell makes money in this market without insider trading.  Or maybe some HFT super computer within 12 ft of the trading floor.  He just got the info from the wrong people.

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