Is Congress Guilty Of The Largest Insider-Trading Scheme Ever?

Mathew Martoma, age 38, was arrested at his home in Boca Raton, Florida, early Tuesday morning by the FBI and charged with insider trading. U.S. Attorney Preet Bharara, whose face appeared on the cover of Time magazine last February as the “man who is busting Wall Street,” was positively joyful in announcing the bust:

The charges unsealed today describe cheating coming and going — specifically, insider trading first on the long side, and then on the short side, on a scale that has no historical precedent.

As a result of the blatant corruption of both the drug research and securities markets alleged, the hedge fund [for whom Martoma worked at the time] made profits and avoided losses of a staggering $276 million, and Martoma himself walked away with a $9 million bonus for his efforts.

At a press conference, Bharara continued:

Mathew Martoma and his hedge fund benefited from what might be the most lucrative inside tip of all time. This is certainly the most lucrative insider-trading scheme ever charged.

It certainly exceeded the amounts involved in the cases of Raj Rajaratnam and Rajat Gupta, both of whom are serving serious jail time for their convictions in insider-trading schemes. Gupta was sentenced in October to two years in federal prison and ordered to pay a $5-million fine, while Rajaratnam was sentenced to 11 years in jail and ordered to pay fines of more than $150 million.

According to Bharara’s statement, Martoma met and carefully cultivated a relationship with Dr. Sid Gilman, a University of Michigan neurologist, who also happened to be the chairman of a safety-monitoring committee which was overseeing the trial of an experimental drug that was being developed by two drug companies, Elan Corporation and Wyeth. When the good doctor passed along initially positive results of the testing to Martoma, his hedge fund bought $700 million worth of stock in June 2008 in both companies and enjoyed an initial ride when the results were made public later.

But when further testing of the drug failed to confirm its efficacy, Gilman passed that along to Martoma, who immediately reversed his positions, sold out his holdings, and then “sold short” shares of both companies, profiting again when the public learned about the bad news later on and forced the companies’ share prices down.

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