By Adam Rubenfire, Daily News Editor
Published November 20, 2012
Neurology Prof. Sidney Gilman is being sued by the U.S. Securities and Exchanges Commission for his alleged role in a historically lucrative insider trading scheme.
Source: University of Michigan
In a complaint filed in the U.S. District Court of the Southern District of New York on Tuesday, the SEC alleged that Gilman provided non-public information about a clinical trial to Matthew Martoma, a portfolio manager at CR Intrinsic Investors, a hedge fund management firm based in Connecticut.
The SEC claims that Martoma's hedge funds and other affiliated funds garnered $276 million in profits or avoided losses in July 2008 by trading securities before Gilman was scheduled to make a "negative public announcement" regarding the results of clinical trials for an Alzheimer's medication being developed for Elan Corporation and Wyeth, Inc..
Wyeth was acquired by Pfizer, Inc. in 2009. Pfizer occupied the North Campus Research Complex before the University bought the facility.
Though the SEC went after Martoma, Gilman and CR Intrinsic, the Wall Street Journal reported that it appears that Steve A. Cohen, founder and owner of SAC Capital Advisors L.P., the parent firm of CR Intrinsic, is the final target.
Though the SEC complaint doesn’t name Cohen or SAC Capital Advisors, it notes that Martoma collaborated with CR Intrinsic’s portfolio manager, known as “Portfolio Manager A,” who is identified as the founder and owner of “Investment Adviser A” — a firm which is also alleged to have benefited from the scheme — and CR Intrinsic. The Journal reported that people close to the investigation have identified Cohen as “Portfolio Manager A.”
Gilman — who served as safety monitoring chair for the trials — is believed to have been rewarded about $100,000 for providing Martoma with information, including detailed results of the trial before the July 2009 public announcement. According to the SEC, Martoma received a $9.3-million bonus in 2008, much of which can be attributed to sales of Elan and Wyeth stock allegedly prompted by Gilman's information.
According to the SEC, Gilman received about $79,000 from Elan Coporation for his work on the trials for the drug, Bapineuzumab.
Gilman was paired with Martoma through an expert network firm, which is a common occurrence for connecting investors or consultants with industry experts for analysis. The SEC complaint does not name the expert network firm, but Gilman's resume, posted on the University of Michigan Health System website, notes that he has held a consulting position with Gerson Lehrman, among several other firms, since 2002. The Wall Street Journal reported Tuesday that individuals familiar with the case have confirmed that the expert network firm used by Gilman and Martoma was Gerson Lerhman.
The case notes that, after dealing with Martoma through the firm for several years, Gilman saw him as a “friend and a pupil.”
According to the SEC complaint, Gilman scheduled his consulting appointments with Martoma around meetings of the Safety Monitoring Committee for the clinical trials, and would share with Martoma what he learned from the meetings.
Martoma was arrested by the FBI and charged Tuesday with conspiracy to commit securities fraud and two counts of securities fraud. He was released on $5 million bail.
Gilman has entered a non-prosecution agreement with the SEC in which he has agreed to settle the charges and cooperate in this case and related investigations in return for not being criminally charged.
In the civil case, the SEC seeks for the court to order Gilman and the other defendants to desist from the illegal activities, pay civil monetary penalties and disgorge all profits resulting from the scheme. Gilman has already agreed to pay $234,000 in settling the case.
The SEC claims that the case is the largest insider trading case it has ever charged. Robert Khuzami, the director of the SEC’s Division of Enforcement, said in a statement that the actors involved took great risk in engaging in illicit activities.
“Today’s record-setting insider trading case reinforces the cold, hard lesson of so many other recent cases that when you trade on inside information, you’re not just betting your money, but also your career, your reputation, your financial security and your liberty,” Khuzami said.
Law prof. Adam Pritchard said information about clinical trials is used in insider-trading schemes frequently.
“The value of that sort of information is potentially very substantial,” Pritchard said.
Pritchard said $276 million is a very significant profit for an insider-trading scheme.
“That is a lot of money, and a lot of money for insider trading,” Pritchard said, adding that the stock exchanges and the SEC often look for unusual, substantial trading prior to major announcements.
Pritchard said it’s not unusual for the SEC to investigate a leak of information prior to a public announcement, but the use of physicians or other experts as a source seems to be a new trend and new investigative priority for the SEC.
“You’d more frequently see somebody inside the company, but the SEC has been looking hard at some of these expert networks, and the line between the experts providing expertise and information can be a bit blurry,” Prtichard said, referring to the consulting firm through which Gilman and Martoma met.
UMHS spokesman Pete Barkey declined to comment on the case on Tuesday, citing an "ongoing federal investigation."
Neither Gilman nor his lawyer, Marc Mukasey, could be reached Tuesday evening.
Both Barkey and and Mukasey later released statements Wednesday. Read them here.
Correction appended: A previous version of this article incorrectly stated that Gilman is still a director of the Michigan Alzheimer's Center.