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Harvard cheat to securities fraud

Feb. 7: Mathew Martoma had been on his way to being another American success story. Today, he is the eighth person who once worked for hedge fund titan Steven A. Cohen to be convicted of insider trading.

A federal jury in Manhattan on Thursday found Martoma guilty of seeking out confidential information related to a clinical trial for an experimental drug for Alzheimer’s disease — information that enabled Cohen’s SAC Capital Advisors to earn $275 million (Rs 1,732 crore).

The son of immigrant parents from India, Martoma, 39, graduated from Duke, attended Harvard Law School and earned an MBA from Stanford before he landed a job as portfolio manager at SAC, one of the most successful hedge funds in the world.

Now, Martoma is expected to receive a sentence of seven to 10 years in prison, legal experts said.

As a guilty verdict on two counts of securities fraud and one count of conspiracy was read in the courtroom in Lower Manhattan, Martoma’s wife, Rosemary, a paediatrician, cried, while he sat stone-faced. A sentencing date was not immediately set for Martoma, who has been free on bail since his arrest.

“We’re very disappointed and we plan to appeal,” said Richard Strassberg, a lawyer for Martoma.

For Cohen, meanwhile, it is business as usual, albeit on a somewhat reduced scale. He is moving ahead with plans to convert his 22-year-old firm into a family office that will manage no outside money, just his $9 billion in personal wealth. The firm will still employ more than 800 people.

The case against Martoma was notable because it was the first time that Cohen was linked to questionable trades at his firm. The two men had a 20-minute phone conversation on July 20, 2008, the day before SAC began selling two drug stocks.

But with the conviction of Martoma, an investigation of Cohen, 57, and his Stamford, Connecticus, hedge fund that lasted almost a decade may have seen its last criminal prosecution.

When SAC was indicted last summer, federal prosecutors called the one-time $14 billion firm a breeding ground for inside trading activity and a “veritable magnet for market cheaters”. Federal authorities have said they are continuing to investigate accusations of insider trading in several other stocks SAC traded.

But there are no pending criminal cases against any former or current SAC employees.

Jonathan Gasthalter, an SAC spokesperson, declined to comment.

Until his arrest in November 2012, Martoma had seemingly checked off all the boxes on the path to success. At SAC, he earned a $9.3 million bonus in 2008, which enabled him and his wife to buy a $1.9 million home in Boca Raton, Florida, for themselves and their three young children.

But much of Martoma’s adult life was chequered with cheating.

In 1999, he was kicked out of Harvard for doctoring his law school transcript — changing several Bs to As — to try to gain a federal clerkship. Soon after, he changed his name from Ajai Mathew Thomas and was admitted to Stanford, where officials were apparently unaware that Martoma had been expelled from Harvard. His deception at Harvard remained a secret for years, even among those who worked alongside him at SAC.

Prosecutors said that in July 2008, two years after he began working at SAC, Martoma “seduced” and “corrupted” two doctors to provide him with confidential information about problems with a clinical trial for an experimental Alzheimer’s drug being developed by Elan and Wyeth, two pharmaceutical companies. SAC had amassed $700 million worth of shares in the two companies, based largely on Martoma’s recommendation.

After a secret meeting on July 19, 2008, with one of those doctors, who had disclosed the final results of the trial, Martoma called Cohen at his home on a Sunday, prosecutors said. The very next day, at Cohen’s instructions, the hedge fund began selling those stocks.

The jury convicted Martoma of charges that he used that inside information to recommend that SAC liquidate its position in those stocks.

The conviction of Martoma adds to the perfect record of the United States attorney’s office in Manhattan in prosecuting insider trading cases in the hedge fund industry. The office has now secured 79 convictions or guilty pleas since the crackdown began with the October 2009 arrest of Galleon Group founder Raj Rajaratnam, who was convicted of 14 counts of securities fraud and conspiracy in May 2011.