Legal Newsline

Wednesday, September 18, 2019

SEC alleges $276M insider trading scheme

By Stephanie Ostrowski | Nov 26, 2012

WASHINGTON (Legal Newsline) - The largest insider trading case ever charged by the Securities and Exchange Commission alleges a $276 million scheme for a clinical trial Alzheimer's drug jointly developed by two pharmaceutical companies.

Charged Tuesday by the SEC was a Stamford, Conn.-based hedge fund advisory firm, CR Intrinsic Investors LLC, its former portfolio manager, Matthew Martoma, and a medical consultant, Dr. Sidney Gilman.

The allegations by the SEC are against Martoma, of Boca Raton, Fla., for illegally obtaining confidential details about the clinical trial from Gilman.

Gilman, who lives in Ann Arbor, Mich., where he works as a medical school professor, served as chairman of the safety monitoring committee overseeing a clinical trial. He was selected by Elan Corporation and Wyeth to present final drug trial results to the public.

According to the SEC's complaint filed in federal court in Manhattan, through phone calls arranged by Gilman's second job at a New York-based expert firm, Gilman tipped Martoma with safety data and eventually details about negative results in the clinical trial about two weeks before they were to be made public in July 2008.

With the inside information regarding the second phase of the trial of the potential Alzheimer's drug called bapineuzumab, Martoma allegedly caused several hedge funds managed by CR Intrinsic and others managed by an affiliated investment advisor to sell more than $960 million in Elan and Wyeth securities in just over a week.

The massive change allowed CR Intrinsic and the affiliated advisory firm to gain approximately $82 million in profits and $194 million in avoided losses giving them a total of more than $276 million in illicit gains, the SEC says.

According to the SEC, Martoma received a $9.3 million bonus at the end of 2008, which is a significant portion of the monies generated by the scheme, according to the SEC's complaint. Gilman received more than $100,000 for his consolations in addition to $1,000 an hour for his works and also received about $79,000 from Elan in 2007 and 2008, the SEC says.

Gilman will settle with the SEC and has agreed to cooperate with the SEC investigations. He has agreed to pay more than $234,000 in disgorgement and prejudgment interest. Gilman has also agreed to a permanent injunction against further violations of the federal securities law.

The proposed settlement is subject to approval by the court.

In conjunction with Gilman's charges, the U.S. Attorney's Office for the Southern District of New York announced criminal charges against Martoma and a non-prosecution agreement with Gilman.

The SEC's complaint charges each of the defendants with violating Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and seeks a final judgment ordering them to disgorge their ill-gotten gains plus prejudgment interest, ordering them to pay financial penalties, and permanently enjoining them from future violations of these provisions of the federal securities laws.

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