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Connecticut Advisory Firm Charged With $276 Million Insider Trading Scheme

The Securities and Exchange Commission (“SEC”) has charged hedge fund advisory firm, Stamford-based CR Intrinsic Investors LLC (“CR”); its former portfolio manager, Mathew Martoma of Boca Raton, Florida; and medical expert Dr. Sidney Gilman of Michigan with perpetrating a $276 million insider trading scheme. The alleged scheme involved a clinical trial for an Alzheimer’s drug being developed by pharmaceutical companies, Wyeth and Elan Corporation. According to the SEC, it is the largest insider trading case the agency has ever brought.

The SEC’s complaint asserts that Gilman, a professor of neurology at the University of Michigan Medical School, was a consultant for Elan and Wyeth from 2003 to 2009. Gilman was the chairman of the safety monitoring committee that was overseeing the clinical trial of bapineuzumab, an investigational Alzheimer’s drug.

The Complaint filed by the SEC alleges that Gilman gave Martoma, whom he met through a New York expert network firm, non-public information about the negative results in the clinical drug trial, before the results were made public. The SEC alleges that in mid-2008, after Martoma was given the inside information about the drug trial from Gilman but before the information was made public, Martoma caused hedge funds managed by CR and an affiliated investment advisor to sell a $700 million combined long position in Wyeth and Elan.

The SEC claimed the liquidation allowed the hedge funds to make $82 million in profits and avoid $194 million in losses, resulting in a total illicit gain of $276 million. The SEC claims that Martoma was given a $9.3 million year-end bonus in 2008, a significant portion of which was related to the sell-off of Elan and Wyeth stock.

The SEC’s Complaint charged the defendants with violations of the federal securities laws and seeks disgorgement of ill-gotten gains and payment of interest and penalties. Gilman has agreed to settle the charges with payment of $234,000 in ill-gotten gains and interest.

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