MANHATTAN (CN) - The SEC today filed the largest inside-trading case in its history, charging CR Intrinsic Investors, a Connecticut hedge fund adviser, and two people with a $276 million scheme involving an Alzheimer's drug.
The SEC sued the Stamford-based hedge fund adviser, its former portfolio manager Matthew Martoma, and Dr. Sidney Gilman, a neurology professor at University of Michigan Medical School.
"This is an insider trading case where affiliated investment advisers and their hedge funds made over $276 million in illegal profits or avoided losses in July 2008 by trading ahead of a negative public announcement involving the clinical trial results for an Alzheimer's drug being jointly developed by Elan Corporation, plc ('Elan') and Wyeth," the SEC says in its federal complaint.
"Martoma, then a portfolio manager at CR Intrinsic, an unregistered investment adviser, perpetrated the scheme with Gilman, a professor of neurology at the University of Michigan Medical School. Gilman served as the chairman of the Safety Monitoring Committee (the 'SMC') overseeing the clinical trial, and was selected by Elan and Wyeth to present the final clinical trial results at a July 29, 2008 medical conference, which was to coincide with the after-market hours public announcement of the trial results by the two companies (the 'July 29 Announcement').
"Martoma met Gilman through paid consultations that took place between 2006 and 2008, and were arranged by a New York-based expert network firm. During these consultations, Gilman provided Martoma with material nonpublic information about the ongoing clinical trial. In addition, starting on or around July 17, 2008, Gilman provided Martoma with the actual, detailed results of the clinical trial, in advance of the July 29 Announcement.
"After Martoma received this information, he caused hedge fund portfolios managed by CR Intrinsic as well as hedge fund portfolios managed by an affiliated investment adviser ('Investment Adviser A') not only to liquidate their combined long positions in Elan and Wyeth, worth over $700 million, but also to take substantial short positions, eventually selling over $960 million in Elan and Wyeth securities in just over a week. This massive re-positioning allowed the CR Intrinsic and Investment Adviser A hedge funds to collectively reap illicit profits and avoid losses of over $276 million.
"These illicit gains resulted from trades placed by or on behalf of the CR Intrinsic portfolios controlled by Martoma, and the Investment Adviser A portfolios controlled by that entity's portfolio manager ('Portfolio Manager A'), who collaborated closely with Martoma in making the trading decisions.
"At the end of2008, Martoma received a $9.3 million bonus, a significant portion of which was attributable to the illegal profits that the CR Intrinsic and Investment Adviser A hedge funds had generated in this scheme.
"Gilman received over $100,000 from the expert network firm for his consultations with Martoma and others at CR Intrinsic and Investment Adviser A."
The SEC seeks disgorgement and penalties.