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From Securities Regulation Daily, September 8, 2014

Martoma said to get 9 years for insider trading

By Mark S. Nelson, J.D.

The federal court in Manhattan today sentenced Mathew Martoma for his role in the insider trading scandal that engulfed S.A.C. Capital Advisors, LLC (S.A.C.). A jury convicted Martoma of conspiracy to commit securities fraud and of two substantive securities fraud counts this past February. In the days leading up to his sentencing, Martoma had asked the court to upend his conviction and to adjust the Probation Office’s sentencing recommendation downward. The court denied Martoma’s request for judgment of acquittal or new trial last Thursday (U.S. v. Martoma, September 5, 2014, Gardephe, P.).

S.A.C. gain drove sentence. Martoma’s lawyers urged the court to either disregard the federal sentencing guidelines or re-calculate Martoma’s alleged “gain” to arrive at a much lower number than did the Probation Office. According to the Probation Office, Martoma’s base offense level of 8 should be upped 28 levels because his gain included nearly $276 million in S.A.C. profits and avoided losses, plus his $9.4 million bonus.

The government backed the Probation Office’s findings. Despite a variance in S.A.C.’s profits between the government’s brief ($275 million) and the pre-sentence report ($276 million), these factors and Martoma’s previously clean criminal record would yield a sentence range of between 188 and 235 months (15.6 and 19.5 years) in prison.

The court quickly rejected Martoma’s argument that the sentencing guidelines are inapt. Judge Gardephe said that even though the guidelines are now advisory instead of mandatory, they remain the “starting point” for a court to arrive at a sentencing decision. Martoma next asked the court to fix his gain at either the amount of his personal gain ($6.3 million: $9.4 million bonus from S.A.C. less $3.1 million in taxes paid) or the amount of profits in the account he managed ($49 million). The court sided with the Probation Office.

Section 2B1.4 of the guidelines refers to a “total increase” of the realized value from securities trading by the defendant and those who act “in concert with” him or to whom the defendant gave inside information. The court said this phrase means the increase in value realized by the defendant and others who traded (or not); the phrase does not, however, mean only the defendant’s realized value.

Judge Gardephe noted that many other courts have taken this view in recent, high-profile insider trading cases. The judge also noted that Martoma conceded that “gain” means the government must show Cohen got inside information from Martoma, even though the government did not allege that Cohen was Martoma’s co-conspirator.

Guideline threshold met. The court also rejected Martoma’s argument that his gain was less than the $200 million threshold for the 28-level enhancement. Based on a variety of claims, Martoma had argued for a gain of $131.9 million. But the court said it need not reduce S.A.C.’s gain due to its losing long position in one of the stocks because S.A.C.’s general counsel testified that no trading in S.A.C.’s equity swap in that stock occurred during the relevant period.

The court said it need not look to extrinsic market factors at the onset of the 2008 financial crisis (e.g., unusual volatility) that Martoma said may have swayed the prices of the stocks involved. The court noted the difference between fraudulent misrepresentation cases (defendant’s acts are separated from market forces) and insider trading cases (no separation), where the key is that the defendant benefitted from unlawful trading, not the effect of his trading on markets.

Likewise, the court declined to apply the “conservative approach” urged by Martoma of using the highest intraday stock price instead of the closing stock price as urged by the government. Martoma’s expert arrived at a gain below $200 million by applying a deduction for S.A.C.’s losing equity swap, a deduction the court had already rejected. Instead, the court said Martoma’s gain exceeded $200 million under either the government’s or Martoma’s view, once the deduction was removed.

The court also rebuffed Martoma’s claim that someone else provided the information about one of the stocks based on Cohen’s deposition testimony to the SEC. The court said Cohen’s testimony was not credible because it was often inculpatory of Martoma, and Cohen may have given a rosier view of S.A.C.’s activities because the SEC was then investigating S.A.C.

Forfeiture of bonus. Lawyers for Martoma separately argued in a court filing last week that the judge should limit the amount of his bonus that is subject to forfeiture to $6.5 million, if $2.9 million in withheld amounts and other items are subtracted from the total $9.4 million bonus. Martoma said he never “acquired” or “controlled” the withheld amounts under the forfeiture law.

The government replied today to Judge Gardephe’s order last Friday asking for its views on Martoma’s bonus. Not surprisingly, the government asked the court to order forfeiture of the gross amount of $9.4 million. According to the government, the disputed $2.9 million is not a “direct cost” that can be taken out of the calculation.

The government also said Martoma’s citation to the Contorinis case is inapt because the defendant there was not required to forfeit profits earned by a fund that was an innocent third party. Here, the government said Martoma was the beneficiary of the bonus. Moreover, the government said Martoma’s tax argument was weak because a variety of factors could have lessened his tax liability. As of publication, the court’s orders regarding the sentencing and forfeiture were not yet publicly available.

The case is No. 12 Cr. 973 (PGG).

Attorneys: Daniel Prugh Roeser (Goodwin Procter LLP) for Mathew Martoma. Eugene Edward Ingoglia, U.S. Attorney’s Office for the USA.

Companies: S.A.C. Capital Advisors, LLC; Elan Corporation, plc; Wyeth

MainStory: TopStory NewYorkNews Enforcement FraudManipulation

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