Dec. 9 (Bloomberg) -- SAC Capital Advisors LP founder Steven Cohen told U.S. regulators a decision to sell shares at the heart of a $276 million dollar insider-trading case going to trial next month was based on advice from outside his firm.
Lawyers for former SAC fund manager Mathew Martoma, who is accused of persuading Cohen to sell shares of two drugmakers based on illegal tips, made public 40 pages from a 253-page transcript of Cohen’s day-long deposition last year in an investigation by the U.S. Securities and Exchange Commission. Martoma argues that the previously undisclosed testimony shows he wasn’t involved in Cohen’s decisions to sell Wyeth and then short shares of Wyeth and Elan Corp.
Prosecutors claim SAC liquidated its $700 million stake in the two companies in July 2008 and then shorted the stocks, within a week after they say Martoma learned confidential information about negative test results from a clinical trial on bapineuzumab, a drug intended to treat Alzheimer’s disease.
Cohen told lawyers in his deposition that he decided to sell his stake in the companies after the head of another hedge fund, who had recommended the Wyeth investment, said he was selling his shares.
“We’re good friends,” Cohen, who hasn’t been charged with wrongdoing, said of Wayne Holman, a former SAC employee who left and started Ridgeback Capital Management LLC. “We go to dinner. The wives are friendly. You know, we see each other off and on.”
The Martoma case, which goes to trial Jan. 6, is the first to directly link Cohen to trades in which illegal information was used. Martoma included the deposition excerpts in filings in Manhattan federal court on Dec. 6. Cohen’s testimony came in the SEC’s investigation of trading in Elan. The SEC later filed an administrative claim accusing Cohen of failing to properly supervise trading by employees, including Martoma and Michael Steinberg, an SAC fund manager.
In a separate case, Steinberg is now being tried on insider-trading charges in Manhattan federal court.
SAC, the Stamford, Connecticut-based hedge fund founded and owned by Cohen, agreed to close its investment advisory business as part of a $1.8 billion deal announced Nov. 4 to end a criminal probe and a money-laundering lawsuit filed by the Justice Department. Manhattan U.S. Attorney Preet Bharara has called SAC “a veritable magnet for market cheaters.”
Jonathan Gasthalter, a spokesman for SAC at Sard, Verbinnen & Co., didn’t respond to phone and e-mail messages seeking comment on the deposition.
Cohen testified on May 3, 2012, in the SEC’s fourth-floor office in downtown Manhattan. Around the table sat three SEC enforcement division lawyers and a staff accountant. Cohen and SAC were defended by three lawyers, led by Martin Klotz of Willkie Farr & Gallagher LLP and Daniel Kramer of Paul Weiss Rifkind Wharton & Garrison LLP. After being sworn, Cohen began testifying a little after 10 a.m., according to the transcript.
Cohen told the SEC lawyers that his firm invested in Wyeth, and later liquidated SAC’s holdings in the stock, based largely on the recommendation of Holman.
SAC in late 2007 reached an agreement to invest in Wyeth at Holman’s recommendation and to give him a percentage of the profit, Cohen said. By the beginning of 2008, the firm’s $627 million Wyeth investment represented one of its biggest equity holdings.
“I consider Wayne one of the great health-care investors I have ever met and so I have a ton of respect for his work,” Cohen said. “If he’s positive on something and recommends a position -- and he did -- you know, I would be very willing to - - to invest in that.”
Holman later closed his fund, Cohen said. At the time of Cohen’s SEC testimony, he said he was paying Holman $20 million a year as a consultant to SAC.
Holman didn’t respond to e-mails seeking comment on the filings.
At the same time Holman was giving him bullish advice on Wyeth, Cohen said, Martoma was recommending Elan based on his knowledge of bapineuzumab, which was undergoing tests for safety and effectiveness.
“They are both coming at it from different stocks,” Cohen said. “Martoma liked both names and Wayne liked Wyeth.”
Prosecutors claim Martoma learned the negative drug trial results from Sidney Gilman, one of the physicians overseeing the tests, and recommended that SAC sell its Wyeth and Elan shares, in a 20-minute conversation with Cohen on Sunday, July 20, 2008.
In his deposition, Cohen said he sold the Wyeth stake after Holman told him he was selling Wyeth.
“I don’t recall much other than he was telling me he is selling his -- he is selling some Wyeth,” Cohen testified. “I know he was nervous about the world, the macro picture, but he didn’t give me any specifics.”
Cohen said SAC sold its Elan shares after Martoma told him he was uncomfortable with the position. Secrecy was a priority to stay ahead of other investors, Cohen said.
“It was a big position,” Cohen said. “Ten and a half million shares is a lot of stock to sell. The more people you tell, the more they talk. The more they talk, the more it gets out that you are selling Elan.”
“We wanted to do it quietly so we would, you know, execute as efficiently as we could so it didn’t get out and people run in front of us or -- so we’d get out at a decent price,” Cohen said.
10.5 Million Shares
One of the SEC lawyers showed Cohen an e-mail from SAC head trader Phillipp Villhauer to Cohen and others at SAC on July 27, 2008, the Sunday one week after Martoma is alleged to have told Cohen to sell Wyeth and Elan. According to the e-mail, SAC had sold more than 10.5 million shares of Elan at an average price of $34.21.
“This was executed quietly and efficiently over a four day period,” Villhauer said in the e-mail.
Villhauer didn’t respond to voice-mail and e-mail messages seeking comment on Cohen’s testimony.
Cohen told the SEC that Villhauer used software algorithms that allow traders to break up their orders to make them less conspicuous. And Villhauer also traded through dark pools, he said. According to the SEC, dark pools are exchanges that can be used to hide the identity of buyers and sellers.
The same day he got the Villhauer e-mail, Cohen e-mailed an SAC health-care stock trader, saying: “Between you and me, you can’t mention to anyone, I am completely out” of Elan.
Three days later, after Elan and Wyeth’s July 29 announcement of the negative test results, Elan dropped to $21.43. Wyeth fell the most in six years.
Martoma attached the excerpts from Cohen’s SEC deposition to court papers seeking to persuade U.S. District Judge Paul Gardephe, who’s overseeing his trial, to bar evidence that he took part in SAC’s decision to liquidate its Wyeth stake or short Wyeth and Elan, or in the manner in which the shares were sold.
Prosecutors have said Martoma’s case involves the most lucrative insider-trading scheme ever charged against an individual. If convicted, Martoma, who has pleaded not guilty, faces as long as 20 years in prison on each of two securities- fraud counts and five years for a single conspiracy charge.
Because Cohen “intends to assert his constitutional rights” not to risk incriminating himself by testifying at Martoma’s trial, the defense argued it should be allowed to introduce portions of the SEC testimony.
The case is U.S. v. Martoma, 12-cr-00973, and the Steinberg case is U.S. v. Steinberg, 12-cr-00121, U.S. District Court, Southern District of New York (Manhattan).
--Editors: Michael Hytha, Joe Schneider