(Updates with lawyer’s remarks in fourth paragraph.)
Jan. 30 (Bloomberg) -- The judge in Mathew Martoma’s insider-trading trial warned his lawyers against questions tied to Steven Cohen’s trading strategies, saying it could open the case to a wider probe of the SAC Capital Advisors LP founder.
“General questions about how Steve Cohen conducted his trading I think are very dangerous -- dangerous in the sense that they represent a risk of opening the door to a broader examination of how Steve Cohen did business,” U.S. District Judge Paul Gardephe told a lawyer for Martoma outside the hearing of jurors and spectators yesterday, according to a transcript. “And I think we all agree that that is not a path we want to go down.”
The warning came as Martoma’s lawyer was questioning a research trader characterized as Cohen’s “right-hand man” in an attempt to distance the defendant from trades prosecutors claim were based on inside information.
“He wants to make sure the trial does not become some sort of sideshow on Cohen,” said Michael S. Weinstein, a partner with the law firm Cole, Schotz, Meisel, Forman & Leonard PA in Hackensack, New Jersey. Weinstein, a former trial attorney with the U.S. Department of Justice, said Gardephe was also trying to ensure that the trial remain focused on Martoma and that jurors hear evidence that’s relevant to the charges against him.
Martoma is on trial in federal court in Manhattan after prosecutors failed to persuade him to cooperate in their investigation of Cohen. The government claims Martoma had a 20- minute phone call with Cohen in July 2008 after getting non- public results of a clinical drug trial of bapineuzumab, which was intended to treat Alzheimer’s disease.
SAC Capital benefited by $276 million in illegal profits and avoided losses after selling its $700 million position in Elan Corp. and Wyeth, the companies that were developing the drug, within days of the phone call, the government alleges.
In November, SAC Capital agreed to plead guilty to securities fraud and end its investment advisory business as part of a record $1.8 billion settlement of the government’s investigation of insider trading at the firm. The agreement must be approved by a judge before it can take effect. Cohen, who denies wrongdoing, hasn’t been charged.
Martoma, who hasn’t testified, is charged with conspiracy and two counts of securities fraud. He faces as long as 20 years in prison if convicted of the securities-fraud charges. Martoma claims the information he got was public and that SAC Capital sold its shares for reasons unrelated to the alleged illegal tips.
Gardephe, in warning the Martoma team away from questioning about Cohen, was sending “a direct, overt signal” that he would allow prosecutors to raise questions about Cohen if they went any further, said Weinstein, who is chair of the White Collar Defense and Investigations practice at his firm.
The research trader, Chandler Bocklage, was one of three men who had worked closely with Cohen and were questioned by Martoma’s lawyers yesterday. The defense also completed questioning of Peter Nussbaum, SAC Capital’s chief in-house lawyer, and called SAC Capital trader Jeffrey Miller.
In his questioning of Bocklage, defense attorney Roberto Braceras asked the witness to describe Cohen as a trader.
“I personally think that Steve Cohen is the greatest trader of all time,” Bocklage answered.
“And what makes him such a great trader?” Braceras asked, drawing an objection from Assistant U.S. Attorney Arlo Devlin- Brown. A second question about how Cohen “trades around risk” prompted another objection from Devlin-Brown. Gardephe called the lawyers to the bench for a private huddle.
“I’m very concerned with general questions about Steve Cohen’s trading strategies,” Gardephe told Braceras. “So I don’t know where you are going with this but I am concerned.”
Braceras said that because Cohen was responsible for two accounts through which most of the Wyeth and Elan shares were sold, he wanted to ask about Cohen’s trading strategy.
“Just three or four questions which he is going to say, I believe, that Mr. Cohen’s general strategy -- and he works with the man for eight years -- is to avoid risk, and that means that if there is a large event, if there is earnings reports or if there is a large event, in working with him he knows that his practice is to avoid that risk and sell out before there is a big risk,” Braceras said, according to the transcript.
SAC Capital was able to make profits and avoid losses on its Elan and Wyeth positions by trading them before the disappointing results of the bapineuzumab testing were announced July 29, at a medical conference in Chicago, prosecutors claim.
Devlin-Brown argued that the questions would allow him to cross-examine Bocklage about a U.S. Securities and Exchange Commission administrative action against Cohen claiming he failed to properly supervise the hedge fund’s activities.
“If we start going in the next area of what he supposedly understands Mr. Cohen’s general practices to be, we would certainly want to ask and elicit that perhaps his general practices include insulating himself from portfolio managers who have inside information and making judgments on him,” Devlin- Brown said.
After Gardephe warned against opening the door to a “broader examination” of Cohen’s business, Braceras agreed to drop the line of questions.
Richard Strassberg, another Martoma lawyer, told Gardephe that he expects to conclude the defense case this afternoon. That would mean closing arguments in the case would begin Feb. 3.
The case is U.S. v. Martoma, 12-cr-00973, U.S. District Court, Southern District of New York (Manhattan).
--Editors: Peter Blumberg, Michael Hytha