Neurologist in 'Most Lucrative Insider Trading Scheme Ever Charged'

Susan Jeffrey

November 26, 2012

The Securities and Exchange Commission (SEC) has named a well-known neurologist in a case of insider trading that has resulted in charges by the Federal Bureau of Investigation (FBI) and the US Attorney for the Southern District of New York against a portfolio manager at the hedge fund that benefited from the information.

Sidney Gilman, MD, 80, professor of neurology at the University of Michigan Medical School, Ann Arbor, allegedly released data on negative results of a phase 2 trial of bapineuzumab in Alzheimer's disease before their being made public in 2008. Dr. Gilman is now described by the FBI as "a 'cooperating witness' for the government and has entered into a non-prosecution agreement." On the other hand, a former portfolio manager for a division of a group of affiliated hedge funds, Mathew Martoma, will face insider trading charges.

A joint statement released November 20 from Preet Bharara (US Attorney for the Southern District of New York) and April Brooks (Special Agent in Charge of the Criminal Division of the New York Office of the FBI) announced the charges against Martoma, saying he "allegedly used material, non-public information ('inside information') that he received from a doctor who served as an adviser to Elan Corporation PLC ('Elan') on the clinical trial of an Alzheimer's Disease drug to make profits and avoid losses for the hedge fund in an amount totalling approximately $276 million."

Martoma, 38, was arrested at his home in Boca Raton, Florida, and made an initial appearance in federal court in West Palm Beach, the joint statement notes. He will appear in Manhattan federal court November 26. He faces 1 count of conspiracy to commit securities fraud and 2 counts of securities fraud. Maximum penalties are 5 years in prison for the conspiracy charge and 20 years on each of the 2 securities fraud charges, along with maximum fines of $250,000 (or twice the gross gain or loss derived from the crime for the conspiracy charge) and $5 million (or twice the gross gain or loss derived from the crime for each of the fraud charges).

Although not facing these criminal charges, Dr. Gilman is still named in an SEC complaint along with Martoma and CR Intrinsic LLC, the hedge fund. The SEC is seeking "permanent injunctions against each of the defendants, enjoining them from engaging in the transactions, acts, practices, and courses of business alleged in this Complaint, and disgorgement, on a joint and several basis of all ill-gotten gains, including profits realized and losses avoided from the unlawful insider trading activity set forth in this Complaint, together with prejudgement interest," the SEC filing notes. The commission also seeks civil penalties and "any other relief the Court may deem appropriate. …"

A statement from the SEC, also released November 20, confirms that Dr. Gilman has agreed to pay more than $234,000 in disgorgement and prejudgement interest. "He also agreed to a permanent injunction against further violations of the federal securities laws," the SEC notes. "The proposed settlement is subject to approval by the court, which also will determine at a later date whether any additional financial penalty is appropriate."

On November 21, the University of Michigan in Ann Arbor, Dr. Gilman's institution, released this statement:

"The University of Michigan takes this situation very seriously and is carefully reviewing all of Dr. Gilman’s activities while a faculty member at our University. There is an ongoing legal process, and we recognize the importance of letting that process occur. The University of Michigan has comprehensive guidelines in place to govern activity in both clinical trials and for University employees engaged in consulting work, and any actions taken will be in accordance with University policies."

A spokesperson for the university has since confirmed that Dr. Gilman retired from the University of Michigan as of November 27.

Bapineuzumab Trial

The insider information in question concerns the negative result of a phase 2 trial of bapineuzumab in patients with mild to moderate Alzheimer's disease that was presented in July 2008 in Chicago at the Alzheimer's Association International Conference, then known as the International Conference on Alzheimer's Disease (ICAD).

The joint statement from the FBI and the US Attorney for the Southern District of New York notes that Dr. Gilman served as a consultant to Elan and Wyeth from 2003 to 2009, when Elan sold its interest in certain drugs to Janssen/Pfizer. He "moonlighted as a consultant for the expert network firm and was paid approximately $1,000 per hour for his consultations," the statement said.

Allegations in the 3-count criminal complaint say that during the period of this scheme, Martoma was a portfolio manager at the hedge fund and responsible for investment decisions in public companies in the healthcare sector, including Elan and Wyeth, which were jointly involved in developing bapineuzumab.

To get inside information about the drug trial, Martoma arranged for approximately 42 paid consultations with Dr. Gilman between 2006 and July 2008. The trial results were slated to be presented at that point by Dr. Gilman, who was chair of the Safety Monitoring Committee (SMC) for the trial, and also was paid to consult with financial industry clients through an expert networking firm, the joint statement notes.

"Through an exploitation of Martoma's personal and financial relationship through the expert networking firm with the doctor, Martoma used these consultations to obtain inside information about the drug trial that the doctor learned at the SMC meetings and through other communications with Elan and Wyeth," the statement said.

"Dr. Gilman developed a personal relationship with Martoma, eventually coming to view Martoma as a friend and pupil," the SEC statement notes.

Many of these consultations were scheduled to take place after SMC meetings at which Elan and Wyeth reported on the status of the bapineuzumab trial, as well as other developments, the joint FBI/US Attorney statement added. Because the expert network had explicit rules prohibiting consultants from sharing inside information, and Martoma was required to inform them of the purpose of the proposed consultations, Martoma and Dr. Gilman would "disguise the agenda for their conversations. In one case, for example, they claimed they would be talking about multiple sclerosis treatments, and in another, Parkinson's Disease, concealing that, in fact, they were discussing the drug trial," the joint statement said.

The initial insider information Martoma received from Dr. Gilman was the safety data, showing generally positive results. On this basis, Martoma increased holdings in Elan and Wyeth and recommended to the hedge fund owner that the fund's position with these companies be increased, which the owner did; by June 20, 2008, the fund held approximately $700 million worth of these companies' equity securities, the statement notes.

ICAD Presentation

In late June of that year, Dr. Gilman, referred to as "the CW" or confidential witness in the statement, was asked to present the phase 2 results at the then upcoming ICAD meeting on July 29, 2008, which, according to the SEC complaint, was to coincide with the after-market-hours public announcement of the trial results by the 2 companies.

"Until that time, he [Dr. Gilman] had only been privy to the safety results of the drug trial," the statement said. "In preparation for the ICAD presentation, the CW was made aware — for the first time — of the efficacy results scheduled for July 15, 2008, and they were negative, particularly in comparison with market expectations. The results raised serious questions about how well the drug worked and, in fact, whether it worked at all."

On July 17, 2008, the statement alleges, Dr. Gilman shared the negative results in a call with Martoma and also provided him with a draft PowerPoint presentation that had been created for the ICAD meeting and that was marked "Confidential, Do Not Distribute."

Three days later, on July 20, 2008, Martoma sent the hedge fund owner an email in which he wrote that "It's important [that we speak]," which they did, for approximately 20 minutes, the joint statement said.

"The hedge fund owner then directed the hedge fund to sell Elan and Wyeth securities prior to the ICAD presentation," the joint statement adds. "Over the next seven days, the hedge fund liquidated its entire position in Elan and almost all of its position in Wyeth — a total of 17.7 million shares worth approximately $700 million. The hedge fund also shorted Elan and Wyeth by approximately 7.75 million shares. This trading represented over 20 percent of the reported U.S. trading volume in Elan and 11 percent of the volume in Wyeth."

The day after the ICAD presentation, Elan stock closed some 42% lower and Wyeth shares fell approximately 12%. "Through this trading activity, the hedge fund is alleged to have earned profits and avoided losses of approximately $276 million," the statement said.

The SEC complaint says Martoma received a $9.3 million bonus, "a significant portion of which was attributable to the illegal profits that the CR Intrinsic and the other investment advisory firm had generated in this scheme." Dr. Gilman, the complaint adds, received $100,000 from the expert network firm for his consultations with Martoma and others at the hedge funds.

'No Historical Precedent'

The headline of the joint statement from the FBI and New York US Attorney's Office calls this case "the most lucrative insider trading scheme ever charged." Manhattan US Attorney Preet Bharara characterized the charges as "cheating coming and going — specifically, insider trading first on the long side, and then on the short side, on a scale that has no historical precedent."

As alleged, by cultivating and corrupting a doctor with access to secret drug data, Mathew Martoma and his hedge fund benefited from what might be the most lucrative inside tip of all time. Preet Bharara

"As alleged, by cultivating and corrupting a doctor with access to secret drug data, Mathew Martoma and his hedge fund benefited from what might be the most lucrative inside tip of all time," Bharara adds. "As Martoma allegedly got sneak peeks at drug data, he first recommended that the hedge fund build up a massive position in Elan and Wyeth stock and then caused the fund to shed those shares after getting a secret look at the unexpectedly bad results of a clinical drug trial. And so, overnight, Martoma went from bull to bear. As a result of the blatant corruption of both the drug research and securities markets alleged, the hedge fund made profits and avoided losses of a staggering $276 million, and Martoma himself walked away with a $9 million bonus for his efforts. The SEC and FBI deserve particular praise for uncovering the facts leading to today's charges."

"Today's arrest is the latest in the FBI's 5-year campaign to root out insider trading at hedge funds and expert networking firms, which has resulted in more than 70 arrests to date," FBI Special Agent Brooks added in the same statement. "What we see again is an unholy alliance between an insider willing to divulge valuable non-public information and a money manager to whom that information is as good as gold. The recurring theme through all of the contact between the insider and Martoma was their knowledge that what they were doing was wrong, prohibited by their respective employers' policies, and illegal.

"They engaged in continual subterfuge to disguise or conceal their communications," Brooks said. "A competitive advantage gained through superior research and analysis is one thing. Cheating is another matter altogether. If the information isn't public, you can't trade on it. We will continue to bring these cases so long as people fail to act accordingly."

Subsequent phase 3 trials of bapineuzumab and another monoclonal antibody, solanezumab (Eli Lilly) have in the end not shown benefit with these agents in patients with mild to moderate Alzheimer's, and development of bapineuzumab has since been stopped. However, biomarker subanalyses presented just this fall show effects of both of these drugs on β-amyloid in the brain and cerebrospinal fluid of patients with Alzheimer's disease that have raised the question of whether they might be more useful in preclinical disease.

In October, investigators announced that solanezumab is 1 of 3 drugs that will be investigated in the Dominantly Inherited Alzheimer's Network (DIAN) trial, a prevention trial funded by the National Institutes of Health expected to start in early 2013. The other drugs are gantenerumab (Roche) and the β-secretase enzyme inhibitor (Eli Lilly); all target β-amyloid.