Kit Addleman in Bloomberg Business Week: SAC Insider Case Rides Finra Referral to Cohen’s Backyard


The biggest insider case ever, an alleged $276 million fraud that has led prosecutors and securities regulators to the inner-circle of SAC Capital Advisors LP’s Steven Cohen, stemmed in part from a referral from the Financial Industry Regulatory Authority.

The referral from Wall Street’s self-regulator came in 2008 from the New York Stock Exchange Division of Market Regulation, which later became part of Finra, according to three people familiar with the matter. Finra touted the resulting case, against ex-SAC portfolio manager Mathew Martoma, under its website headline, “Actions Resulting from Referrals to Federal and State Authorities.”

The question for the government now is: Where do they go from here? Court papers cite a “hedge fund owner” in conversation with Martoma before multimillion-dollar trades were made. But the government must show that a defendant in any insider trading case knew that the trades he was making were based on secret, material information. Regulatory action for a failure to supervise traders may be an easier path...

Should prosecutors seek to build a case against Cohen, they may cite the alleged 20-minute conversation between Martoma and the hedge fund owner, said Kit Addleman, a former regional director of the SEC now in private practice with the firm Haynes and Boone, LLP. The two spoke after Gilman e-mailed Martoma a 24- page presentation detailing poor drug test results, following which SAC began selling Elan and Wyeth shares, according to the complaint. 

Excerpted from Bloomberg Business Week, November 26, 2012. To view full article, click here. 

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