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Prosecutors face a deadline next week that may force them to tip their hand on whether they’re in plea talks with an ex-SAC Capital Advisors LP manager to get him to testify against founder Steven Cohen about insider trading.
Federal speedy-trial rules require Manhattan prosecutors to secure a grand jury indictment by Dec. 26 against portfolio manager Mathew Martoma, who was charged in a complaint Nov. 20 with making illegal trades on two drug company stocks after receiving confidential tips.
Martoma, 38, may agree to postpone the U.S. deadline. If he does, prosecutors requesting the adjournment sometimes tell the presiding judge whether the two sides are in plea talks, or at least provide some hint of negotiations.
“There are all types of reasons why they could adjourn the case,” said Stephen Miller, a former federal prosecutor in New York and Philadelphia. “It gives the government more time to investigate the case and to negotiate all types of plea deals.”
In what U.S. prosecutors call the “most lucrative” insider scheme ever, Martoma was accused of trading on shares of Elan Corp. and Wyeth LLC based on tips he got from Sidney Gilman, a University of Michigan neurologist.
Gilman, 80, oversaw a clinical trial of an Alzheimer’s drug by Wyeth and Elan and allegedly passed the results to Martoma before the disappointing news became public, prosecutors said. The trades netted $276 million in profits and avoided losses for SAC affiliate CR Intrinsic Investors, prosecutors said.
The complaint doesn’t name Cohen, referring only to a “Hedge Fund Owner” with whom Martoma spoke. A person familiar with the case identified the fund owner as Cohen last month.
Martoma, who lives in Boca Raton, Florida, and was fired from SAC in 2010, hasn’t responded to the charges, though his lawyer has said he will be exonerated. Gilman entered a cooperation deal in which the U.S. agreed not to prosecute him.
Jonathan Gasthalter, a spokesman for Stamford, Connecticut- based SAC, declined to comment on the deadline. He has said Cohen and SAC acted appropriately in making the trades.
Defense attorney Charles Stillman, who said at Martoma’s court hearing last month that he’d likely seek an adjournment, didn’t return calls for comment. Jerika Richardson, a spokeswoman for U.S. Attorney Preet Bharara, declined to say if prosecutors will seek an indictment from a grand jury or ask for an extension.
With an indictment, which members of a grand jury decide on following a presentation of evidence by prosecutors, Martoma’s case will be assigned to another judge and head toward a trial. It’s also possible Martoma will eventually plead guilty without entering into a cooperation deal, lawyers said.
Matt Levine, a former U.S. prosecutor in Brooklyn, New York, said a court filing next week may signal that negotiations are underway or represent a pause in proceedings before an indictment is handed down. Galleon Group LLC co-founder Raj Rajaratnam, now serving 11 years in prison for insider trading following his conviction, wasn’t indicted until two months after his arrest.
“Before indictment, the conventional wisdom is that the government and the defense have much more flexibility on how they’re going to reach a resolution,” Levine, who is now in private practice, said in a telephone interview. “It’s not unusual in my experience for an extension to be sought.”
Martoma rejected several government bids for cooperation, according to a person familiar with the case. When first confronted by an FBI agent on the lawn of his mansion last year, he fainted, another person said.
Martoma’s arrest, followed by a well-publicized press conference by U.S. officials, may spur him to reconsider the government’s cooperation bid.
“Now that the indictment is imminent, Martoma may be running out of maneuvering room,” said Anthony Sabino, who teaches law at the Tobin School of Business at St. John’s University in New York. “The government’s leverage may have increased dramatically.”
Criminal defendants typically seek leniency at sentencing in return for cooperation. Ex-Intel Corp. executive Rajiv Goel was sentenced to probation in September after testifying against Rajaratnam.
Added incentive for Martoma to cooperate may come from the Dec. 17 guilty verdicts of ex-Diamondback Capital Management LLC portfolio manager Todd Newman and Level Global Investors LP co-founder Anthony Chiasson in a $72 million insider scheme. Newman and Chiasson, who left SAC Capital to start Level Global, face as many as 20 years in prison at their April sentencing.
“Two very high-profile convictions increase the pressure,” said John Sylvia, who co-chairs the securities litigation practice at Mintz Levin Cohn Ferris Glovsky and Popeo.
If there’s no indictment next week, Sylvia doubts prosecutors will offer details of potential plea talks in their upcoming court filing, which may contain boilerplate language designed to meet legal requirements for a postponement.
“They probably want to keep things shrouded in a little bit of mystery,” he said in a telephone interview. Doing so would “keep the heat on other people” prosecutors may be targeting, said Sylvia, who isn’t involved in the case.
During the trial of Chiasson and Newman, the judge ruled Level Global’s other co-founder, SAC Capital alumnus David Ganek, and SAC Capital fund manager Michael Steinberg, were unindicted co-conspirators. Neither has been charged with a crime. The trial also revealed e-mail messages the government has obtained in its investigation involving another SAC portfolio manager, Gabe Plotkin. He hasn’t been charged with a crime either.
Plotkin, who hasn’t been accused of wrongdoing, is one of 10 portfolio managers at Sigma focusing on consumer stocks. He joined SAC in 2006 and is among the firm’s top portfolio managers, overseeing more than $1 billion, according to a person with knowledge of the firm.
At the same time, Martoma may be innocent and unwilling to plead or have no information implicating Cohen or others at SAC. Then, the U.S. case would begin and end with Martoma.
“He’s got to have the facts,” said Miller, who is now in private practice at Cozen O’Connor. Otherwise, “the government would have no interest.”
It could take anywhere from a few days to many months for the two sides to hammer out a deal, should there be one.
Scott Sullivan, the former finance chief at WorldCom Inc., didn’t appear in court to plead guilty and disclose his cooperation until 1½ years after his indictment for accounting fraud at what was then the second-largest U.S. long-distance company.
Sullivan testified against former Chief Executive Officer Bernard Ebbers, who was convicted and sentenced to prison for 25 years. Sullivan, another Boca Raton resident, served five years for his role in the $11 billion fraud.
Jon Horvath, an analyst at SAC unit Sigma Capital Management LLC, fought insider charges from his February arrest until September, when he pleaded guilty a month before trial and agreed to cooperate. After his 2010 arrest, French physician Yves Benhamou agreed to help prosecutors build a case against FrontPoint Partners LLC fund manager Joseph Skowron, who later pleaded guilty.
A near-certainty is that there won’t be a preliminary hearing on the Martoma matter next week, Miller said. Under the law, prosecutors, rather than indicting Martoma, may present evidence to a judge establishing “probable cause” to accuse him of insider trading. Such a probable cause determination will in turn allow them to proceed toward trial.
Rather than holding a hearing and subjecting government witnesses to cross-examination by a defense lawyer, prosecutors would simply ask a grand jury to indict him, he said.
The case is U.S. v. Martoma, 12-mj-02985, U.S. District Court, Southern District of New York (Manhattan).
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