The High-Stakes Insider Trading Trial of Mathew Martoma

People are bracing the cold to line up for a seat at the Thurgood Marshall United States Courthouse in lower Manhattan for a hearty dose of Wall Street white collar crime. District Court Judge Paul Gardephe is presiding over what the government has called "the most lucrative insider trading scheme ever charged." As the prosecution launches its case-in-chief, the following is what to expect at trial.

The criminal indictment alleges that former SAC Capital Advisors hedge fund portfolio manager Mathew Martoma committed securities fraud and conspiracy when he traded securities based on material, non-public information concerning clinical trials for an experimental Alzheimer's disease drug known as bapineuzumab. As a result of illegal trading (dumping the stock due to the drug's ineffectiveness), the hedge fund realized profits and avoided significant losses.

The government's challenge is to educate the jury about the mechanics of insider trading without talking down to them. For example, in opening statements the prosecutor must explain what type of information is considered material and non-public. Charts are often used to present a time line for jurors to note when the secret information was tipped to the defendant and when the illegal trading occurred. Jurors must be able to connect the dots and follow the money trail.

The government will set the stage and provide jurors with background about Martoma's special relationship with the drug companies by calling former colleagues and health care analysts who worked with him. The government's primary witnesses are doctors Sidney Gilman and Joel Ross. They allegedly tipped inside information about the negative results of the secret drug trials to Martoma before it was made public. Both have cut deals with the government to testify against the defendant.

Dr. Gilman, the star witness, is a retired professor of neurology at the University of Michigan who worked as a consultant for Elan Corporation. According to court documents, he is expected to testify that Martoma arranged for approximately 42 paid consultations with him to obtain confidential information about the on-going drug trials. Based on information he received from Gilman, Martoma bought shares of Elan Corporation and Wyeth Pharmaceuticals for his own portfolio and recommended purchasing additional shares for SAC, which they did. Elan and Wyeth selected Gilman to publicly present the final results of the clinical trials at the Alzheimer's disease conference on July 29, 2008. Prosecutors will introduce email and phone records showing that Gilman and Martoma were in close communication around the time when Gilman received the secret results of the trials. The results were negative and raised questions about whether the drug had any meaningful effect on the treatment of Alzheimer's.

Prosecutors are expected to produce further evidence that Martoma flew to Detroit on July 19, 2008, to meet with Gilman to discuss the negative results of the drug trials. Following the meeting, Martoma allegedly recommended in a phone conversation with billionaire Steven A. Cohen, SAC's owner, that SAC sell virtually all of its shares of Elan and Wyeth stock prior to the public announcement. SAC sold $700 million worth of the stock and engaged in short sales and options trades. Following the negative public announcement, shares of Elan stock lost 42 percent of their value and Wyeth stock fell by 12 percent. Prosecutors will produce evidence that SAC's combined profits and avoided losses through its illegal sale of Elan and Wyeth stock between July 21 and July 29 were estimated to be approximately $276 million. Further, prosecutors are expected to link Martoma's $9.3 million bonus to this illegal scheme. Jurors will likely be astounded by the numbers, which the government will certainly play up throughout the trial.

Martoma is represented by Richard M. Strassberg, a prominent high-priced lawyer with the law firm Goodwin Procter. Many wonder why Martoma refused to strike a plea bargain with prosecutors when the evidence appears to be stacked against him. Some speculate that he doesn't want to strike a deal against Cohen. After all, SAC (Cohen) is funding Martoma's defense.

Strassberg's team will attack the advantageous deals that government witnesses made to avoid criminal charges through vigorous cross-examination. They will likely produce evidence that Martoma based his recommendation to sell on other legal sources of information. The defense strategy will be to attack the government's case, blaming aggressive law enforcement tactics, to create reasonable doubt in the minds of jurors. Judge Gardephe rejected a key defense motion to introduce into evidence Cohen's 2012 deposition before the SEC to show that it was Cohen who made the decision to sell the Elan and Wyeth shares, not Martoma. Gardephe held that the testimony was unreliable and self-serving. Jurors will not hear evidence that Martoma fainted when FBI agents informed him about their insider-trading investigation against him. It is unlikely that Martoma will testify in his own defense.

Cohen has not been charged criminally, but SAC pleaded guilty to securities fraud last November and must pay $1.8 billion. The SEC has accused Cohen of failing to prevent insider trading at SAC in a civil action.

Martoma faces up to 15 years in prison if convicted. The 39-year-old has a wife and three young children. Based on the evidence and recent high percentage rates of convictions for insider trading, Martoma's likelihood of prevailing is slim.