by T. GormanPosted on Posted in SECActions

Just when it appeared that the expert network insider trading investigations had come to an end with convictions and guilty pleas, the Manhattan U.S. Attorney’s Office and the SEC announced the filing of what may be the most lucrative of insider trading cases with profits made and losses avoided totaled $276 million. The criminal case named as a defendant portfolio manager Mathew Martoma, while the civil action added his former employer, CR Intrinsic Investors, LLC and Dr. Sidney Gilman as defendants. U.S. v. Martoma, 12 mag 2985 (S.D.N.Y. Unsealed Nov. 20, 2012); SEC v. CR Intrinsic Investors, LLC, Civil Action No. 12 cv 8466 (S.D.N.Y. Filed Nov. 20, 2012).

CR Investors is a Stamford, Connecticut based unregistered investment adviser affiliated with unidentified Investment Adviser A. Mr. Martoma served as portfolio manager until 2010. He met Dr. Gilman through a New York expert network firm. At the time the doctor, a professor of neurology at the University of Michigan Medical School, had a consulting contract with Elan Corporation, plc. He consulted on certain clinical trials being conducted by Elan and Wyeth. Specifically, from 2006 through 2008 the two companies were conducting clinical trials for the Alzheimer’s drug, bapineuzumab.

Beginning as early as 2007 Dr. Gilman is alleged to have furnished Mr. Martoma with inside information on the Phase II trial for the drug. The portfolio manager secured power point presentations with detailed information about the drug and the trials from Dr. Gilman. The Doctor also provided telephone briefings and updates.

On June 17, 2008 the top line results for the Phase II trial were released. The share price rose. Subsequently, Dr. Gilman was selected to present the Phase II Trial results at the International Conference on Alzheimer’s Disease, scheduled for July 29, 2008. The Doctor then sent Mr. Montoma an e-mail requesting an expert network conversation.

The Doctor also traveled to Elan’s offices on July 15 and 16, 2008 to review the full results of the Phase II Trial. In the period prior to the July 29 announcement the trader and the doctor spoke several times on the phone. During the conversations, according to the court papers, Mr. Martoma was given the then confidential results of the trials. He was also furnished a copy of a power point presentation with detailed information. At the time funds managed by Mr. Martoma and related funds at an affiliated entity held a combined long position of over $700 million in Elan and Wyth securities. As a result of the inside information the long positions were liquidated. The funds immediately built a substantial short position in each security.

Following the announcement of disappointing results, the funds had profits of about $82 million on the short positions. By liquidating their massive long positions the funds avoided losses of about $194 million. Overall the trading profits and losses avoided totaled over $276 million.

Mr. Martoma received a $9.3 million bonus at the end of 2008, a significant portion of which was attributable to the illegal trading profits. Dr. Gilman was paid over $100,000 by the expert network and $79,000 under his consulting contract with Elan for work in 2007 and 2008.

In the criminal case Mr. Martoma has been charged with one count of conspiracy to commit securities fraud and two counts of securities fraud. Dr. Gilman entered into a

non-prosecution agreement. The case against Mr. Martoma is pending.

The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Dr. Gilman settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. He also agreed to pay $234,000 in disgorgement and prejudgment interest. The court will determine at a later date if any additional financial penalty is appropriate. The action is pending as to the other two defendants.

Hurricane Sandy: As we prepare to give thanks with family and friends this Thanksgiving please remember the victims of Sandy with a donation to the Red Cross (here).

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by T. GormanPosted on Posted in SECActions

The SEC and the U.S. Attorney’s Office, New Jersey, brought civil and criminal insider trading charges against, respectively, six and seven individuals based on a five year insider trading ring that garnered over $1.4 million in illegal profits. Three of the individuals are executives at pharmaceutical companies. Several been friends since high school. Overall there were ten tippees At the center of the trading was four take-over transaction and six earnings releases which spawned trading tracing to 2007 and continuing through mid-2012. Elaborate steps were taken to conceal the trading. Those steps failed. SEC v. Lazorchak, Case No. 2:12-cv-07164 (D.N.J. Filed Nov. 19, 2012).

The Commission’s complaint named as defendants: John Lazorchak, Director of Financial Reporting at pharmaceutical company Celgene Corporation; Mark Cupo, Director of Accounting at Sanofi-Aventis Corporation, another pharmaceutical company and a former co-worker of Mr. Lazorchak; Mark Foldy, employed in the marketing department at a third pharmaceutical company, Styker Corporation; Michael Castelli, a friend of defendant Cupo; Lawrence Grum, who holds a brokers license and attended high school with defendant Castelli; Michael Pendolino; and James Deprado who is not named as a defendant in the criminal case. Defendants Larzorchak, Pendolino, Foldy and Deprado attended the same high school.

The ring is alleged to have traded on inside information in advance of four corporate take-over announcements:

  • Celgene’s acquisition of Pharmion corporation, announced on November 19, 2007;
  • Sanofi’s acquisition of Chattem, Inc., announced on December 21, 2009;
  • Celgene’s of Abraxix BioSciences, Inc., announced on June 30, 2010; and
  • Stryker’s acquisition of Orthaveta, Inc., announced on May 16, 2011.

Insider trading also is alleged to have occurred prior to the announcement by Celgene that it was withdrawing an application from the European Medicines Agency’s Committee on June 21, 2012 and earnings announcements for the quarters ended: September 30, 2009; March 31, 2010; June 30, 2010; September 30, 2010; June 30, 2011; and March 31, 2012.

The basic scheme involved an arrangement devised by Messrs. Castelli and Grum. It called for Mr. Lazorchak, through defendant Cupo, to furnish them inside information obtained from his position at Celgene. Mr. Cupo served only as a middleman. Defendants Castelli and Grum placed the trades, often in options. Mr. Cupo would be compensation for his role.

The idea behind the scheme was to separate the source of the information from the securities transactions to conceal the activity. Other steps were also taken to avoid detection. The members of the scheme typically interacted with Mr. Cupo in person. The traders also purchased Celgene securities at times when then did not have inside information. In some cases they sold portions of their holdings in advance of the corporate announcement. The traders also created contemporaneous research files and e-mails regarding the transactions to justify the trades.

Over time the scheme expanded. Mr. Lazorchak illegally tipped Messrs. Pendolino and Foldy and was in turn compensated by them. Messrs. Pendolino also tipped others as the number of tippees multiplied.

At the outset of the scheme FINRA identified the trading of Messrs. Foldy and Pendolino following the acquisition of Pharmion by Celgene. The regulator circulated a questionnaire to executives at Celgene asking that they specify if they knew anyone on a list of names which included Messrs. Foldy and Pendolino. Mr. Lazorchak falsely reported that he did not know either man. He later informed both men along with defendant Cupo about the FINRA questionnaire and his actions. Mr. Cupo reassured the group that their plan would evade detection, a step he took repeatedly according to the SEC.

The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 14(e) and Securities Act Section 17(a). Each defendant in the criminal case is charged with multiple counts including conspiracy and securities fraud. The defendants voluntarily surrendered in the criminal action. Both cases are pending.

Hurricane Sandy: As we prepare to give thanks with family and friends this Thanksgiving please remember the victims of Sandy with a donation to the Red Cross (here).

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