Sac Capital Case Study

As Dr. Sid Gilman approached the stage, the hotel ballroom quieted with anticipation. It was July 29, 2008, and a thousand people had gathered in Chicago for the International Conference on Alzheimer’s Disease. For decades, scientists had tried, and failed, to devise a cure for Alzheimer’s. But in recent years two pharmaceutical companies, Elan and Wyeth, had worked together on an experimental drug called bapineuzumab, which had shown promise in halting the cognitive decay caused by the disease. Tests on mice had proved successful, and in an initial clinical trial a small number of human patients appeared to improve. A second phase of trials, involving two hundred and forty patients, was near completion. Gilman had chaired the safety-monitoring committee for the trials. Now he was going to announce the results of the second phase.

Alzheimer’s affects roughly five million Americans, and it is projected that as the population ages the number of new cases will increase dramatically. This looming epidemic has added urgency to the scientific search for a cure. It has also come to the attention of investors, because there would be huge demand for a drug that diminishes the effects of Alzheimer’s. As Elan and Wyeth spent hundreds of millions of dollars concocting and testing bapineuzumab, and issued hints about the possibility of a medical breakthrough, investors wondered whether bapi, as it became known, might be “the next Lipitor.” Several months before the Chicago conference, Barrons published a cover story speculating that bapi could become “the biggest drug of all time.”

One prominent investor was known to have made a very large bet on bapi. In the two years leading up to the conference, the billionaire hedge-fund manager Steven A. Cohen had accumulated hundreds of millions of dollars’ worth of Elan and Wyeth stock. Cohen had started his own hedge fund, S.A.C. Capital Advisors, with twenty-five million dollars in 1992 and developed it into a fourteen-billion-dollar empire that employed a thousand people. The fund charged wealthy clients conspicuously high commissions and fees to manage their money, but even after the exorbitant surcharge investors saw average annual returns of more than thirty per cent. S.A.C. made investments in several thousand stocks, but by the summer of 2008 the firm’s single largest position was in Wyeth, and its fifth-largest was in Elan. All told, Cohen had gambled about three-quarters of a billion dollars on bapi. He was famous for making trades based on “catalysts”—events that might help or hurt the value of a given stock. Sid Gilman’s presentation of the clinical data in Chicago was a classic catalyst: if the results were promising, the stocks would soar, and Cohen would make a fortune.

Gilman had not wanted to make the presentation. Seventy-six years old and suffering from lymphoma, he had recently undergone chemotherapy, which left him completely bald—like the “evil scientist in an Indiana Jones movie,” he joked. But Elan executives urged Gilman to participate. He was a revered figure in medical circles, the longtime chair of neurology at the University of Michigan’s medical school. In Ann Arbor, a lecture series and a wing of the university hospital were named for him. His C.V. was forty-three pages long. As a steward for the fledgling drug, he conveyed a reassuring authority.

But soon after Gilman began his thirteen-minute presentation, accompanied by PowerPoint slides, it became clear that the bapi trials had not been an unqualified success. Bapi appeared to reduce symptoms in some patients but not in others. Gilman was optimistic about the results; the data “seemed so promising,” he told a colleague. But the investment community was less sanguine about the drug’s commercial prospects. One market analyst, summarizing the general feeling, pronounced the results “a disaster.” The Chicago conference was indeed a catalyst, but not the type that investors had expected.

It appeared that Cohen had made an epic misjudgment. When the market closed the following day, Elan’s stock had plummeted forty per cent. Wyeth’s had dropped nearly twelve per cent.

By the time Gilman made his presentation, however, S.A.C. Capital no longer owned any stock in Elan or Wyeth. In the eight days preceding the conference, Cohen had liquidated his seven-hundred-million-dollar position in the two companies, and had then proceeded to “short” the stocks—to bet against them—making a two-hundred-and-seventy-five-million-dollar profit. In a week, Cohen had reversed his position on bapi by nearly a billion dollars.

Gilman and Cohen had never met. The details of the clinical trials had been a closely guarded secret, yet S.A.C. had brilliantly anticipated them. Cohen has suggested that his decisions about stocks are governed largely by “gut.” He is said to have an uncanny ability to watch the numbers on a stock ticker and intuit where they will go. In the assessment of Chandler Bocklage, one of his longtime deputies, Cohen is “the greatest trader of all time.”

But federal authorities had a different explanation for S.A.C.’s masterstroke. More than three years after the Chicago conference, in December, 2012, prosecutors in New York indicted a young man named Mathew Martoma, who had worked as a portfolio manager for Cohen. They accused him of using confidential information about bapi to engineer the most lucrative insider-trading scheme in history. According to the indictment, Martoma had been receiving secret details about the progress of the clinical trials for nearly two years and, ultimately, obtained an early warning about the disappointing results of the second phase. His source for this intelligence was Sid Gilman.

In 1977, after completing medical school at U.C.L.A. and teaching at Harvard and Columbia, Gilman was recruited to run the neurology department at the University of Michigan. He moved to Ann Arbor with his first wife, Linda, and their two sons. Gilman’s marriage unravelled in the early eighties, and the older son, Jeff, developed psychological problems. Jeff committed suicide in 1983, overdosing on pills in a hotel room near campus. Gilman had experienced tragedy before: his father had walked out on the family when he was a boy, and his mother later committed suicide. After Jeff’s death, Gilman seems to have dealt with his despair by throwing himself into his job. “The man worked himself to distraction,” one of his many protégés, Anne Young, who went on to become the chief of neurology at Massachusetts General Hospital, told me. In 1984, Gilman married a psychoanalyst named Carol Barbour, but they never had children, and though his surviving son, Todd, attended the University of Michigan, they eventually became estranged, leaving him with no ties to his former family.

Over the years, however, Gilman became a father figure to dozens of medical residents and junior colleagues. “Helping younger people along—that was a constant,” Kurt Fischbeck, a former colleague of Gilman’s who now works at the National Institutes of Health, told me. Gilman was “incredibly supportive” of younger faculty, Young said. “He would go over grants with us, really putting an effort into it, which is something chairs rarely do.”

One day in 2002, Gilman was contacted by a doctor named Edward Shin, who worked for a new company called the Gerson Lehrman Group. G.L.G., as it was known, served as a matchmaker between investors and experts in specialized industries who might answer their questions. “It was kind of ridiculous that the hedge-fund business got so much information by asking for favors . . . when it would certainly pay,” the company’s chief executive, Mark Gerson, told the Times.

Shin proposed that Gilman join G.L.G.’s network of experts, becoming a consultant who could earn as much as a thousand dollars an hour. Gilman was hardly alone in saying yes to such a proposal. A study published in the Journal of the American Medical Association found that, by 2005, nearly ten per cent of the physicians in the U.S. had established relationships with the investment industry—a seventy-five-fold increase since 1996. The article noted that the speed and the extent of this intertwining were “likely unprecedented in the history of professional-industrial relationships.”

Gilman read the JAMA article, but disagreed that such arrangements were objectionable. In an e-mail to Shin, he explained that investors often offered him a fresh perspective on his own research: “Although remuneration provides an incentive, the most attractive feature to this relationship (at least for me) is the exchange.”

Gilman’s university salary was about three hundred and twenty thousand dollars a year, a sum that went a long way in Ann Arbor. As he took on more paid consultations, he began supplementing his income by hundreds of thousands of dollars a year. Acquaintances did not notice any abrupt change in his life style: Gilman wore elegant clothes, but otherwise he and his wife appeared to live relatively modestly. “He was not a flashy guy who revelled in expensive toys,” Tim Greenamyre, a former student, who now runs the Pittsburgh Institute for Neurodegenerative Diseases, told me. Gilman counselled Greenamyre and other colleagues to avoid even the appearance of a conflict of interest in their professional dealings, and he made a point of telling people that he never invested in pharmaceutical stocks. The consulting, he later maintained, was simply “a diversion.”

In the summer of 2006, Gilman received a call from Mathew Martoma, who explained that he had recently joined S.A.C. and was focussing on health-care stocks. They spoke about Alzheimer’s remedies, and specifically about bapineuzumab. Although Martoma had no medical background, he was attuned to the scientific intricacies at play. His mother and his wife, Rosemary, were physicians, and he had a long-standing interest in Alzheimer’s, dating back to his childhood, in Florida, when he volunteered as a candy striper at a local hospital. He and Gilman talked for more than two hours. Afterward, Martoma asked G.L.G. to schedule another consultation.

S.A.C. was a notoriously intense place to work. Its headquarters, on a spit of land in Stamford, Connecticut, overlooking the Long Island Sound, are decorated with art from Cohen’s personal collection, including “Self,” a refrigerated glass cube, by Marc Quinn, containing a disembodied head sculpted from the artist’s frozen blood. It was nearly as frigid on the twenty-thousand-square-foot trading floor, which Cohen kept fiercely air-conditioned—employees were issued fleece jackets with the S.A.C. monogram, for keeping warm. The atmosphere was hushed, with telephones programmed to blink rather than ring, but a curious soundtrack could be heard throughout the building. As Cohen sat at his sprawling desk, before a flotilla of flat-screen monitors, and barked orders for his personal trades, a camera—the “Steve cam”—was trained on him, broadcasting his staccato patter to his subordinates. Cohen is not a physically imposing man: he is pale and gnomish, with a crooked, gap-toothed smile. But on the Steve cam he was Oz.

When S.A.C. first approached Martoma about a job, he was ambivalent. He was living in Boston, working happily at a small hedge fund called Sirios Capital Management. He knew that careers at S.A.C. followed a starkly binary narrative. Portfolio managers were given a pot of money. If their investments were consistently profitable, they became very rich very quickly. If their investments lost money, they were out of a job. Contracts at S.A.C. contained a “down and out” clause, so it was prosper or die.

Cohen likened his traders to élite athletes; for many years, he paid a psychiatrist who had worked with Olympic competitors to spend several days a week at S.A.C., counselling employees about mastering their fears. He hired high achievers who were accustomed to gruelling pressure. Martoma had studied bioethics at Duke, graduating summa cum laude. After a year working at the National Institutes of Health, where he co-authored a paper, “Alzheimer Testing at Silver Years,” in the Cambridge Quarterly of Healthcare Ethics, he was admitted to Harvard Law School. He departed a year later, during the dot-com boom, and launched a startup. Next, he obtained an M.B.A. from Stanford. S.A.C. was another brand-name institution, a strong allure for someone like Martoma. After visiting the office in Stamford and spending a day shadowing Cohen on the trading floor, he accepted the job.

S.A.C. relied on portfolio managers to devise novel investment ideas. In a marketplace crowded with hedge funds, it had become “hard to find ideas that aren’t picked over,” Cohen complained to the Wall Street Journal, in 2006. In the business, a subtle but crucial informational advantage was called “edge.” Richard Holwell, a former federal judge in New York who presided over high-profile securities-fraud cases, told me that, in order to evaluate a technology stock, hedge funds sent “people to China to sit in front of a factory and see whether it was doing one shift or two.” He added, “An edge is the goal of every portfolio manager.” When Cohen was asked about edge during a deposition in 2011, he said, “I hate that word.” But S.A.C.’s promotional materials boasted about the firm’s “edge,” and Cohen provided his employees with every research tool that might offer a boost over the competition. The eat-what-you-kill incentive structure at S.A.C. put a damper on collegiality. Employees with edge had no motivation to share it with one another. But every good idea was shared with Cohen. Each Sunday, portfolio managers sent a memo to an e-mail address known as “Steve ideas,” in which they spelled out their most promising leads, weighted by their level of conviction.

Martoma had always been avid about research, and he was impressed by S.A.C.’s resources. At his disposal was a boutique firm full of former C.I.A. officers who could monitor the public statements of corporate executives and evaluate whether they were hiding something; S.A.C. also had a “buffet plan” with the Gerson Lehrman Group, giving Martoma unrestricted access to thousands of experts. From his first days in Stamford, he was interested in the investment potential of bapi. He contacted G.L.G. with a list of twenty-two doctors he hoped to consult, all of whom were involved in the clinical trials of the drug. Most declined, citing a conflict of interest; clinical investigators had to sign confidentiality agreements that constrained their ability to talk about the progress of the trials. But Sid Gilman accepted, noting, in his response to G.L.G., that he would “share only information that is openly available.” On the Sunday after the initial conversation with Gilman, Martoma sent an e-mail to Steven Cohen, suggesting that S.A.C. buy 4.5 million shares of Elan stock, and noting that his conviction level was “High.”

Martoma was born Ajai Mathew Thomas in 1974, and grew up in Merritt Island, Florida. His parents had emigrated from Kerala, in southern India, during the sixties. They were Christian; the name Martoma, which the family adopted around the turn of the millennium, is a tribute to the Mar Thoma Syrian Church, an Orthodox denomination that is based in Kerala. Mathew’s father, Bobby, was a stern man with a sharp nose and a clipped mustache. He owned a dry-cleaning business, and placed enormous pressure on his son to succeed. Mathew obliged, excelling in school and starting a lawnmowing operation in which he outsourced the actual mowing to other kids. The oldest of three brothers, he seems to have taken naturally to the role of family standard-bearer. Childhood photographs show him grinning, with his hair neatly parted, in a tiny three-piece suit.

When Martoma’s father first came to America, he was admitted to M.I.T., but he could not afford to attend. He retained a fascination with Cambridge, however, and prayed daily that his oldest son would go to Harvard. Martoma graduated from high school as co-valedictorian, but he ended up going to Duke. Shortly after Mathew’s eighteenth birthday, Bobby presented him with a plaque inscribed with the words “Son Who Shattered His Father’s Dream.”

During college, Martoma volunteered in the Alzheimer’s wing of the Duke Medical Center, and developed an interest in medical ethics. Bruce Payne, who taught Martoma in a course on ethics and policymaking, remembers him as “creased and pressed—very pre-professional.” Payne wrote a recommendation letter for Martoma’s application to business school at Stanford, praising his subtle readings of Sissela Bok’s “Lying” and Albert Camus’s “The Plague.” Martoma was unusually adept at cultivating mentors. “He was ambitious—he wanted to make something of his life,” Ronald Green, who supervised Martoma during his year at N.I.H. and is now a professor at Dartmouth, told me. “To some extent, I felt like Mathew was an adopted son.”

At Stanford, Martoma was introduced to a young pediatrician from New Zealand named Rosemary Kurian. Strikingly beautiful, she was studying for her medical boards so that she could practice in the United States. She had grown up in a sheltered family and had never dated before. But she felt an immediate bond with Mathew: her parents were also from Kerala, and she, too, felt both very Indian and very Western. “I was just enamored with how lovely he was,” she told me recently. “And he seemed to be very respectful of my parents.” Her mother and father endorsed the relationship, and in 2003 Mathew and Rosemary were married, in an Eastern Orthodox cathedral in Coral Gables, Florida.

By the time they moved to Connecticut, they had one child and Rosemary was pregnant with a second. She stopped working, but she was very involved in advancing Mathew’s career. “Mathew didn’t just do that job by himself,” she told me, with a smile. He worked perpetually. “It was heads-down, tails-up, twenty-four-seven kind of work.” Martoma rose at 4 a.m. to keep up with the European health-care markets, then worked until the market in New York closed. After spending a few hours with the children, he put in another shift, sitting in bed with his laptop while Rosemary fell asleep beside him. He had numerous investment prospects, but bapi was the most promising, and it became an obsession. “As a portfolio manager, you live by your ups and downs,” Rosemary said. “These stocks, they’re your babies, and you’re following them and you’re nurturing them.” The fixation became a running joke, and her conversations with him were often punctuated by the word “Bapsolutely!”

Rosemary never met Sid Gilman, but throughout the fall of 2006 Martoma arranged frequent consultations with him about bapi. Much later, in court, Gilman recounted this phase in their relationship as a kind of intellectual seduction. They spoke for hours about the trials for various Alzheimer’s drugs. “Every time I told him about a clinical trial, he seemed to know a good deal about it,” Gilman testified. “The more I told him about each of the trials, the more he wanted to know.” Gilman found himself wishing that his students in Ann Arbor were as bright and curious as Martoma.

That October, Gilman had plans to visit New York on other business, and Martoma arranged to meet with him at S.A.C.’s offices in Manhattan. In an e-mail to G.L.G., Martoma specified that he wanted the meeting “to be with just me and dr. gilman alone.” The appointment was at lunchtime, and when Gilman was shown into the room he was pleased by a small courtesy—an array of sandwiches. Martoma walked in, broad-shouldered and genial, with close-cropped black hair and long eyelashes that gave his face a feline aspect. He was “very, very friendly,” Gilman recalled. Martoma complimented him on “the previous consultations we had.”

According to G.L.G.’s records, Gilman and Martoma had forty-two formal consultations over two years. Gilman consulted with many other investors during this time, and Martoma spoke to many other doctors, but neither spoke to anyone else with nearly the same frequency that they did with each other. It seemed to Gilman that Martoma shared his passion for Alzheimer’s research, and regarded the efforts to create an effective drug as much more than a matter of financial interest. In e-mails, Martoma had a tendency to slip into the first-person plural, using “we” when discussing how medical professionals treated people with the disease.

Gilman also got the impression that Martoma wanted to be friends. Martoma proposed that they have coffee after meetings of the American Academy of Neurology. He talked to Gilman about his family’s emigration from India, and about how he and Rosemary had had their children in rapid succession. In e-mails, he sent his best wishes to Gilman’s “better half.” Gilman called Martoma “Mat,” but, even when they were speaking almost daily, Martoma always addressed him as “Dr. Gilman.” Once, when Gilman was travelling in Istanbul, he forgot about a scheduled consultation. Unable to reach him, Martoma had his assistant make multiple calls to try to track the doctor down. Eventually, a hotel employee discovered Gilman by himself, reading, and alerted him to the calls. “I was in a foreign country, and he couldn’t find me,” Gilman testified. “It was touching.”

Later, Gilman had trouble pinpointing just when his relationship with Martoma crossed into illegality. But he recalled a moment when Martoma asked, repeatedly, about the side effects that one might expect to see from bapi. “I didn’t quite recognize it for what I think it was, which was an attempt to find confidential information,” Gilman said. Initially, he offered theoretical responses, but Martoma “persisted in wanting to know what really happened,” and finally the answers “slipped out.” Gilman told him how many patients and how many placebo cases had experienced each adverse effect. While he was talking, Martoma periodically asked him to slow down, so that he could transcribe the numbers.

In 1942, lawyers in the Boston office of the Securities and Exchange Commission learned that the president of a local company was issuing a pessimistic forecast to shareholders and then offering to purchase their shares. What the president knew, and the shareholders didn’t, was that earnings were on track to quadruple in the coming year. He had edge, which allowed him to dupe his own shareholders into selling him the stock at far below its real value. Later that year, the S.E.C. established Rule 10b-5 of the Securities Exchange Act, making insider trading a federal crime. At the time, one of the commissioners remarked, “Well, we’re against fraud, aren’t we?”

In the ensuing decades, however, enforcement of this prohibition has been inconsistent. Some academics have suggested that insider trading is effectively a victimless crime, and should not be aggressively prosecuted. At least privately, many in the financial industry agree. But in 2009, when Preet Bharara took over as United States Attorney for the Southern District of New York, with jurisdiction over Wall Street, he made it a priority to curb this type of securities fraud. The problem had become “rampant” in the hedge-fund industry, Bharara told me, in part because of a prevailing sense that the rewards for insider trading were potentially astronomical—and the penalty if you were caught was relatively slight. “These are people who are in the business of assessing risk, because that’s what trading is, and they were thinking, The greatest consequence I will face is paying some fines,” Bharara said. His strategy for changing their behavior was to throw a new variable into the cost-benefit equation: prison. Agents from the F.B.I. and the S.E.C. began asking investment professionals to identify the biggest malefactors. Peter Grupe, who supervised the investigations at the F.B.I., told me that all the informants were “pointing in the same direction—Stamford, Connecticut.”

Rumors about insider trading had circulated around Steven Cohen since his first years in the business. As a young trader at a small investment bank called Gruntal & Company, he was deposed by the S.E.C. in 1986 about suspicious trades surrounding General Electric’s acquisition of R.C.A. Cohen asserted the Fifth Amendment and was never indicted, but, during the nineties, as his fund became extraordinarily profitable, observers and rivals speculated that he must be doing something untoward. Like Bernard Madoff’s investment firm, S.A.C. enjoyed a level of success that could seem suspicious on its face. “A lot of people assumed for years that S.A.C. was cheating, because it was generating returns that didn’t seem sustainable if you were playing the same game as everyone else,” the manager of another hedge fund told me.

When Cohen was growing up, as one of eight children in a middle-class family in Great Neck, New York, his father, who owned a garment factory in the Bronx, brought home the New York Post every evening. Cohen read the sports pages, but noticed that there were also “these other pages filled with numbers.” In an interview for Jack Schwager’s book “Stock Market Wizards” (2001), he recalled:

I was fascinated when I found out that these numbers were prices, which were changing every day. I started hanging out at the local brokerage office, watching the stock quotes. When I was in high school, I took a summer job at a clothing store, located just down the block from a brokerage office, so that I could run in and watch the tape during my lunch hour. In those days, the tape was so slow that you could follow it. You could see volume coming into a stock and get the sense that it was going higher. You can’t do that nowadays; the tape is far too fast. But everything I do today has its roots in those early tape-reading experiences.

Cohen was never a “value investor”—someone who makes sustained commitments to companies that he believes in. He moved in and out of stocks quickly, making big bets on short-term fluctuations in their price. “Steve has no emotion in this stuff,” one of his portfolio managers said in a deposition last year. “Stocks mean nothing to him. They’re just ideas, they’re not even his ideas. . . . He’s a trader, he’s not an analyst. And he trades constantly. That’s what he loves to do.”

The business model at S.A.C., though, was based not on instinct but on the aggressive accumulation of information and analysis. In fact, as federal agents pursued multiple overlapping investigations into insider trading at hedge funds, it began to appear that the culture at S.A.C. not only tolerated but encouraged the use of inside information. In the recent trial of Michael Steinberg, one of Cohen’s longtime portfolio managers, a witness named Jon Horvath, who had worked as a research analyst at S.A.C., recalled Steinberg telling him, “I can day-trade these stocks and make money by myself. I don’t need your help to do that. What I need you to do is go out and get me edgy, proprietary information.” Horvath took this to mean illegal, nonpublic information—and he felt that he’d be fired if he didn’t get it.

When Cohen interviewed job applicants, he liked to say, “Tell me some of the riskiest things you’ve ever done in your life.” In 2009, a portfolio manager named Richard Lee applied for a job. Cohen received a warning from another hedge fund that Lee had been part of an “insider-trading group.” S.A.C.’s legal department warned that hiring Lee would be a mistake, but Cohen overruled them. (Lee subsequently pleaded guilty to insider trading.)

White-collar criminals tend to make soft targets for law enforcement. “The success rate at getting people to coöperate was phenomenal,” Peter Grupe told me. Most of the suspects in insider-trading investigations have never been arrested, nor have they contemplated the prospect of serious jail time. When Michael Steinberg was waiting for the jury in his trial to pronounce a verdict, he fainted in open court. So the authorities approached hedge-fund employees, one by one, confronting them with evidence of their crimes and asking them what else they knew. Because the suspects weren’t anticipating being under surveillance, the F.B.I. could tail them for weeks. Then one day, as a suspect headed into a coffee shop and prepared to place his usual order, an agent would sidle up and place the order for him.

The tactics echoed the approach the F.B.I. had used to dismantle the New York Mob. The plan was to arrest low-level soldiers, threaten them with lengthy jail terms, and then flip them, gathering information that could lead to arrests farther up the criminal hierarchy. Over time, agents produced an organizational chart with names and faces, just as they had with La Cosa Nostra. At the top of the pyramid was Steven Cohen.

In 2010, F.B.I. agents approached a young man named Noah Freeman, who had been fired by S.A.C. and was teaching at a girls’ school in Boston. Freeman became a key witness. Asked in court how often he had attempted to obtain illegal edge, he replied, “Multiple times per day.” According to an F.B.I. memo, “Freeman and others at S.A.C. Capital understood that providing Cohen with your best trading ideas involved providing Cohen with inside information.”

When Martoma first came to S.A.C., his due-diligence report had noted his “industry contacts” and his personal “network of doctors in the field.” Through the fall of 2007, he acquired more and more Elan and Wyeth stock, and Cohen followed his lead, supplementing the money that Martoma was investing from his own portfolio with funds from Cohen’s personal account. That October, Martoma e-mailed Cohen that bapi was on track to start Phase III trials soon, and that they would make up “the MOST COMPREHENSIVE ALZHEIMER’S PROGRAM to date.”

S.A.C. had a proprietary computer system, known as Panorama, which allowed employees to monitor the company’s holdings in real time. Employees checked Panorama incessantly, and many noticed the scale of the bet that Martoma, a relatively junior portfolio manager, was making, and the fact that Cohen was backing him. Because of the open plan in the Stamford office and the simulcast from Cohen’s desk, people could watch as Martoma approached the boss and murmured recommendations. A portfolio manager named David Munno, who had a Ph.D. in neuroscience, was skeptical about bapi’s prospects. He didn’t like Martoma, and didn’t understand the source of his conviction. At one point, he wrote to Cohen, wondering whether Martoma actually knew something about the bapi trial or simply had “a very strong feeling.”

“Tough one,” Cohen replied. “I think Mat is the closest to it.”

It’s impossible to know exactly how Martoma buttressed Cohen’s confidence in bapi. Portfolio managers at S.A.C. often wrote detailed explanations to support trading recommendations, but, when it came to bapi, Cohen and Martoma preferred to talk. Martoma’s e-mails to his boss often consisted of a single line: “Do you have a sec to talk?” “Do you have a moment to speak when you get in?” Whenever Munno pressed Cohen on how Martoma knew so much about bapi, Cohen responded cryptically. “Mat thinks this will be a huge drug,” he wrote to Munno at one point. On another occasion, he explained simply that “Mat has a lot of good relationships in this area.”

A second portfolio manager, Benjamin Slate, shared Munno’s concerns, suggesting, in one e-mail, that it was “totally unacceptable to bet ½ billion dollars on alzheimers without a real discussion.” In a message to Slate a month before the Chicago conference, Munno complained that Martoma was telling people he had “black edge.” In subsequent legal filings, S.A.C. has claimed that Munno and Slate coined the term “black edge,” as “humorous commentary.” But, according to subsequent filings by the Department of Justice, “black edge” was “a phrase meaning inside information.”

Initially, Gilman may have “slipped” when he divulged secret details to Martoma, but as their friendship continued the malfeasance became more systematic. Whenever Gilman learned about a meeting of the safety-monitoring committee, Martoma scheduled a consultation immediately afterward, so that Gilman could share whatever new information he had obtained. Apart from consultation fees, Gilman did not receive any additional remuneration from Martoma, yet he slid into ethical breaches with an ease verging on enthusiasm. At one point, Gilman proposed outright deception, suggesting to Martoma that they supply the Gerson Lehrman Group with fraudulent pretexts for meetings, in order to deflect suspicion.

On June 25, 2008, Gilman sent an e-mail to Martoma with the subject line “Some news.” Elan and Wyeth had appointed him to present the results of the Phase II clinical trials at the International Conference on Alzheimer’s Disease, in July. Martoma scheduled a consultation, informing G.L.G., inaccurately, that he and Gilman would be discussing therapies for multiple sclerosis. Up to this point, Gilman had been given access to the safety results of the trials, but he had been “blinded” to the all-important efficacy results. Now, in order to present the findings, Gilman would be “unblinded.”

Two weeks later, Elan arranged for a private jet to fly him from Detroit to San Francisco, where the company had offices. He spent two days with company executives, crafting his conference presentation. When he returned to Michigan, an Elan executive sent Gilman an e-mail titled “Confidential, Do Not Distribute.” It contained an updated version of the twenty-four-slide PowerPoint presentation that would accompany his remarks. After downloading the slide show, Gilman received a call from Martoma. They spoke for an hour and forty-five minutes, during which, Gilman later admitted, he relayed the contents of the presentation. But the material was complicated—too complicated, perhaps, to convey over the phone. Martoma announced that he happened to be flying to Michigan that weekend; a relative had died, but he had been too busy to attend the funeral, so he was going belatedly to pay his respects. Could he swing by? “Sure, you can drop in,” Gilman replied. Two days later, Martoma flew from J.F.K. to Detroit, took a taxi to Ann Arbor, and met with Gilman for an hour in his office on campus. He flew back to New York that evening, without having visited his family. Rosemary picked him up at the airport.

The next morning, Sunday, Martoma e-mailed Cohen, “Is there a good time to catch up with you this morning? It’s important.” Cohen e-mailed Martoma a phone number, and at 9:45 a.m. Martoma called him at home. According to phone records introduced in court, they spoke for twenty minutes.

When the market opened on Monday, Cohen and Martoma instructed Phil Villhauer, Cohen’s head trader at S.A.C., to begin quietly selling Elan and Wyeth shares. Villhauer unloaded them using “dark pools”—an anonymous electronic exchange for stocks—and other techniques that made the trades difficult to detect. Over the next several days, S.A.C. sold off its entire position in Elan and Wyeth so discreetly that only a few people at the firm were aware it was happening. On July 21st, Villhauer wrote to Martoma, “No one knows except me you and Steve.”

SAC Capital Advisors was a group of hedge funds founded by Steven A. Cohen in 1992. The firm employed approximately 800 people[1] in 2010 across its offices located in Stamford, Connecticut and New York City, and various international satellite offices,[2] but reportedly lost many of its traders in the wake of various investigations by the Securities and Exchange Commission (SEC).[3] In 2010, the SEC opened an insider trading investigation of SAC[4] and in 2013 several former employees were indicted by the U.S. Department of Justice.[5] In November 2013, the firm itself pleaded guilty to insider trading charges and paid $1.2 billion in penalties (in addition to $616 million already paid to the SEC),[6] although no formal charges have been filed against Cohen himself. The firm has shrunk after returning the vast majority of its outside (i.e. not controlled by Steven Cohen personally) investor capital. Point72 Asset Management was established as a separate family office in 2014. SAC ceased to exist as a separate entity in 2016.[7]


The company was founded in 1992 with $25 million. It became one of the most successful hedge funds, with SAC averaging annual returns of 30 percent after fees under a 3% management fee and 50% profit fee. The company's strategy was the "mosaic theory of investing" which develops investment positions based on stock information from many sources.[5] SAC focused on trading liquid, large-cap stocks and later began using fundamental and quantitative strategies.[8] The company had $14 billion in assets across four independent portfolios.[9] According to Bloomberg BusinessWeek magazine, SAC Capital Advisors daily trading activity accounts for as much as 3% of the New York Stock Exchange's daily trading and up to 1% of the NASDAQ's daily trades. SAC Capital maintained offices in Stamford, Connecticut, New York City, Hong Kong, Tokyo, Singapore, London, Boston, San Francisco, and Chicago.[10][11]

On December 9, 2013, SAC agreed to sell its reinsurance business, SAC Re, to a group of investors led by insurance-industry veteran Brian Duperreault.[12]


In March 2006, 60 Minutes reported on a lawsuit against SAC filed by Biovail, a Canadian pharmaceutical company which alleged that SAC had manipulated reports on Biovail in order to drive the price of the stock down. SAC denied the charges and said that the stock was overvalued and that the decline was due to earnings shortfalls and regulatory investigations.[13] In August 2009, the New Jersey Superior Court dismissed all of Biovail's claims against SAC Capital.[14] On February 10, 2010, SAC Capital filed a lawsuit in federal court in Connecticut seeking damages from Biovail for filing "vexatious" litigation against SAC in 2006.[15] The lawsuit was settled out of court in November 2010.[16] Under the settlement, Biovail's new owner, Valeant Pharmaceuticals, paid $10 million to SAC.[17]

Fairfax Financial Holdings[edit]

In July 2006, SAC Capital Advisors was one of three industry participants that were sued by Fairfax Financial Holdings Ltd (FFH) and accused of conspiring to manipulate the company's stock price. FFH alleged SAC Capital and other two hedge funds paid analyst John Gywnn and his employer Morgan Keegan to publish negative reports on FFH and drive its stock price down.[18] In December 2008, Fairfax Financial Holdings provided evidence to the court of email exchanges among the hedge funds and Gywnn, discussing the content of the soon-to-be-published report on FFH.[19] In September 2011, the Superior Court in Morris County, New Jersey, granted SAC Capital Advisors’ motion for summary judgment and removed SAC Capital Advisors, Sigma Capital Management, a division of SAC Capital Advisors, and Steven Cohen as defendants from the case.[20] Judge Stephan C. Hansbury wrote in his judgement: “There is no direct evidence of any sort of conspiracy involving SAC to take down Fairfax."[21]


A 2013 article in Yahoo! Finance reported that SAC Capital Advisors had been under investigation by the Securities and Exchange Commission (SEC) for six years.[22] In November 2010, the SEC conducted raids at the offices of investment companies run by former SAC traders.[23] Several days later, SAC received what they described as "extraordinarily broad" subpoenas.[4] In February 2011, two former employees were charged with insider trading.[24] In November 2012, federal prosecutors levied charges against additional former SAC Capital traders.[25][26]Portfolio manager Michael Steinberg was arrested in March 2013 and accused of using inside information to make $1.4 million in profits for SAC Capital.[27] In June 2013 nine former SAC employees were charged with conspiracy and securities fraud.[28] With the conviction of Mathew Martoma on February 6, 2014, after a four-week trial, a total of eight former SAC Capital employees were found guilty.[29]

In July 2013 the SEC filed a civil suit against SAC for failing to properly supervise its traders and the U.S. Department of Justice "filed a five count criminal indictment by a federal grand jury, including four counts of securities fraud and one count of wire fraud."[22] SAC said it would "vigorously fight" the accusations and charges[5][22] but shortly thereafter in November 2013 SAC Capital agreed to plead guilty to all counts of the indictment, stop managing funds for outsiders, and pay a $1.2 billion fine.[6] Trading teams at SAC have since left to join competing hedge funds, such as BlueCrest Capital Management, Millennium Management, and Balyasny Asset Management.[3] On September 8, 2014, Martoma was sentenced to 9 years in prison and ordered to forfeit nearly $9.4 million, more than his net worth.[30]


  1. ^Steve Cohen's Trade, February 26, 2010
  2. ^The Most Powerful Trader on Wall Street You've Never Heard Of BusinessWeek. July 21, 2003.
  3. ^ abCopeland, Rob (December 31, 2013). "SAC Capital Outperforms Peers in 2013". The Wall Street Journal. 
  4. ^ ab"SAC tells investors it got government subpoena". MarketWatch. November 23, 2010. Retrieved 2013-10-15. 
  5. ^ abcFlitter, Emily (July 25, 2013). "U.S. charges SAC Capital with insider trading crimes". Reuters. Retrieved July 31, 2013. 
  6. ^ abProtess, Ben; Lattman, Peter (November 4, 2013). "After a Decade, SAC Capital Blinks". The New York Times/Dealbook. Retrieved 2013-11-06. 
  7. ^SEC Investment Adviser Public Disclosure (IAPD)
  8. ^"Steven Cohen | Institutional Investor's Alpha". 2008-06-26. Retrieved 2013-10-15. 
  9. ^Agustino Fontevecchia (March 13, 2014). "Steve Cohen Personally Made $2.3B In 2013 Despite Having To Shut Down SAC Capital". Forbes. 
  10. ^Ullatil, Parvathy (December 4, 2009). "UPDATE 1-SAC Capital grows in Asia with Singapore office". Reuters. 
  11. ^Tunick, Britt Erica (March 1, 2010). "Inside SAC's Shark Tank". Institutional Investor. 
  12. ^Jennifer Ablan (December 9, 2013). "SAC agrees to sell reinsurance business to investor group". Yahoo! Finance. 
  13. ^Betting On A Fall, Lesley Stahl On One Company's Lawsuit Against A Hedge Fund - CBS News, March 26, 2006Archived May 27, 2008, at the Wayback Machine.
  14. ^Kouwe, Zachery (August 21, 2009). "Judge Dismisses Biovail's Suit Against Hedge Fund". The New York Times. 
  15. ^"SAC Capital turns the tables on Biovail". Reuters. February 19, 2010. Retrieved October 15, 2013. 
  16. ^Valeant Pharmaceuticals Press Release, November 4, 2010
  17. ^Dealbook (November 4, 2010). "Biovail Settles With SAC Capital". The New York Times. Retrieved April 10, 2017. 
  18. ^Weidlich, Thom (February 13, 2009). "Chanos Saw Nonpublic Fairfax Research, E-Mails Show (Update3)". Bloomberg. Retrieved October 15, 2013. 
  19. ^Thom Weidlich (March 16, 2012). "Morgan Keegan Loses Dismissal Bid in $8 Billion Fairfax Suit". Bloomberg Businessweek. 
  20. ^Ahmed, Azam (September 14, 2011). "Judge Drops SAC Capital as Defendant in Civil Suit". The New York Times. 
  21. ^"Cohen's SAC Capital scores legal win over Fairfax". Reuters. September 14, 2011. 
  22. ^ abcNesto, Matt (July 25, 2013). "SAC Capital Indicted for Criminal Securities Fraud". Yahoo! Finance. Retrieved July 25, 2013. 
  23. ^Pulliam, Susan (November 22, 2010). "FBI Raids Hedge Funds as Insider-Trading Probe Widens -". Retrieved 2013-10-15. 
  24. ^Lattman, Peter; Ahmed, Azam (February 8, 2011). "Insider Inquiry Steps Up Its Focus on Hedge Funds". The New York Times. 
  25. ^Lattman, Peter (2012-11-20). "Insider Inquiry Inching Closer to a Billionaire". The New York Times. 
  26. ^Lattman, Peter (March 15, 2013). "SAC Settles Insider Trading Cases for $614 Million". New York Times. Retrieved 15 March 2013. 
  27. ^"Hedge Fund Manager Michael Steinberg Charged With Insider Trading". ABC News. Retrieved 29 March 2013. 
  28. ^"Judge Sets SAC's Martoma Trial for Inside Trading to November 4". JD Journal. Retrieved 2013-10-15. 
  29. ^"SAC still on hook in insider trading probe: Source". CNBC. February 7, 2014. Retrieved February 7, 2014. 
  30. ^"Nine years prison term given to ex SAC manager". CNBC. September 8, 2014. Retrieved September 8, 2014. 


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