FINRA Referral Leads To Insider Trading Investigation

FINRA Referral Leads To Insider Trading Investigation

By Erica Reed

November 27th, 2012  9:00am

The biggest insider case ever, an alleged $276 million fraud, stemmed in part from a 2008 referral from the Financial Industry Regulatory Authority (FINRA).  FINRA, a Wall Street self-regulator, detects one-time offenders who may tip friends and family, as well as more sophisticated rings that work to conceal their trading and sources of inside information.  Referrals from FINRA are often pursued by investigators from the Securities and Exchange Commission (SEC) and prosecutors from the Justice Department.

On November 20, 2012, U.S. prosecutors charged former SAC Capital employee, Mathew Martoma, with insider trading in a series of transactions that hedge fund titan Steven A. Cohen had personally signed off on.  In what they called “the most lucrative” insider-trading scheme ever, prosecutors alleged that Martoma helped Cohen’s firm avoid losses and reap profits totaling $276 million in the summer of 2008 by using insider tips he got from a doctor about Elan Corp and Wyeth LLC.

According to court papers, Martoma spoke in July 2008 to the “hedge fund owner” – Cohen – and recommended selling shares of Elan and Wyeth before a negative announcement on clinical trial results for an Alzheimer’s drug jointly developed by the two companies. The criminal complaint filed by federal prosecutors and a related civil lawsuit filed by the SEC allege that Martoma obtained the insider information from a doctor who is not named in the criminal complaint because he is now cooperating with prosecutors after agreeing to pay a $186,781 disgorgement.

Martoma had worked for a unit of SAC Capital called CR Intrinsic Investors in Stamford, Connecticut, until 2010.  According to federal prosecutors, CR Intrinsic, which in 2008 mostly traded with Cohen’s own money, had initially taken long positions in Elan and Wyeth stocks before reversing itself over the course of one week, selling some stock and building up massive short positions that accounted for one-fifth of all trading in Elan.

At a Nov. 20 press conference, SEC lawyer Sanjay Wadhwa said the case “was at least based in part from other investigations that focused on CR Intrinsic, but also based in part from a referral from FINRA.”  FINRA touted the resulting case, against ex-SAC portfolio manager Martoma, under its website headline, “Actions Resulting from Referrals to Federal and State Authorities.”

Erica Reed is an associate attorney at Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor, P.A.  She is a member of the Business Torts Department of the firm.  Her practice focuses primarily upon representing individuals and entities in the areas of securities litigation and arbitration, as well as complex business and antitrust litigation.

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