Mathew Martoma was a Portfolio Manager at S.A.C. Capital Advisors, a US hedge fund. S.A.C. Capital Advisors (now known as Point72 Asset Management) is led by Steven Cohen a hedge-fund legend with a net worth estimated to be over $11bn. Years of double-digit growth at S.A.C. have attracted rumors about the methods used by Steve Cohen to attain consistently great returns.
In September 2014, Mathew Martoma was found guilty of taking part in the biggest insider trading transaction in history which netted a profit of $276 million.
Insider trading is “the trading of a public company’s stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the company. In various countries, trading based on insider information is illegal”.
Mathew Martoma speculated on the stocks of 2 companies : Elan and Wyeth. Both these companies were involved in the development of a drug called Bapineuzumab or “Bapi”. They invested hundred of millions of dollars to create Bapi and test its use in the treatment of Alzheimer’s disease. As the destinies of Elan and Wyeth became entangled in the success of Bapi, Mathew Martoma sought out any information he could on the results of the drug trials.
It is normal for investors to seek out information on the companies they trade. That usually means reading publicly available material disclosed by the companies. Mathew Martoma went above and beyond that. He consulted with a Doctor directly involved in the trials and managed to gain his trust. Through this relationship, in July 2008 he learnt before Wyeth and Elan made any public announcement that Bapi was failing as a viable drug. In a few days, Mathew Martoma liquidated his $700M position on the 2 companies and proceeded to short them. His firm S.A.C. netted a $275M profit in the process.
Just 6 years after this success, Mathew Martoma is set to serve a 9-year sentence for insider trading. It is a rare occurrence as insider trading crimes are notoriously hard to prove.
In the cases of insider trading, two or more persons are exchanging information. They usually are both profiting from the crime and thus have a strong incentive to remain silent. The persons involved in the insider trading cases are also well educated. Mathew Martoma for example attended Harvard Law and had a degree in Ethics. He had a good knowledge of what could be used to convict him and he actively protected himself. His mails and text messages to his boss Steven Cohen were briefs as they exchanged sensitive information orally.
To prove that Mathew Martoma was guilty of insider trading, the U.S. Securities and Exchange Commission (or SEC) which is the Federal agency responsible to regulate the securities industry, had to answer one question : how Martoma had access to information about the Bapi trials?
Finding such a connection is a difficult problem. The SEC has access to a lot of data as it can arrange interviews and request phone calls or mails. The problem is how to find a link hidden in all that data?