Martoma Insider Trading: Scheme, Trial, and Appeal

The Martoma insider trading case was a federal prosecution of former SAC Capital portfolio manager Mathew Martoma, who in 2014 was convicted of trading on confidential Alzheimer’s drug trial results and sentenced to nine years in prison. Federal prosecutors called it the most profitable illegal trading scheme ever charged in the United States, generating roughly $275 million in gains and avoided losses for the hedge fund.¹ The case reshaped how courts define insider trading liability and forced the hedge fund industry to overhaul its use of expert networks.

How the Scheme Worked

Martoma was a portfolio manager at CR Intrinsic Investors, an SAC Capital affiliate focused on healthcare stocks. The trades at the center of the case involved Elan Corporation and Wyeth, two pharmaceutical companies jointly developing the Alzheimer’s drug bapineuzumab. Early safety data looked promising, and Martoma used that information to push SAC Capital into a massive long position. By the spring of 2008, the fund held roughly $700 million worth of stock in the two companies.²

The scheme peaked in July 2008. About two weeks before the trial results were to be released publicly, Martoma learned that the final Phase II data showed the drug lacked the efficacy researchers had hoped for.³ Martoma alerted SAC Capital’s owner, and the fund rapidly liquidated its entire position in both stocks and flipped to short positions, betting the share prices would fall. When the negative results became public and both stocks cratered, SAC Capital walked away with approximately $275 million in combined profits and avoided losses.

The Tipper: Sidney Gilman and the Expert Network

The information came from Dr. Sidney Gilman, a prominent neurologist at the University of Michigan who chaired the safety monitoring committee for the bapineuzumab trial. Martoma had cultivated the relationship through an expert network firm, paying Dr. Gilman at a rate of $1,000 per hour and racking up dozens of consultations over many months.³ Those calls were timed around safety monitoring committee meetings, and during them, Dr. Gilman walked Martoma through confidential presentations and results, including the final unfavorable data.

Dr. Gilman entered a non-prosecution agreement with the government in exchange for his cooperation. He avoided criminal charges, settled separate SEC civil claims by paying more than $234,000 in disgorgement and interest, and agreed to a permanent ban on further securities law violations.⁴

Charges, Trial, and Verdict

The U.S. Attorney’s Office for the Southern District of New York charged Martoma with one count of conspiracy to commit securities fraud and two substantive counts of securities fraud.¹ The trial, presided over by U.S. District Judge Paul G. Gardephe, began in January 2014 and ran for four weeks.

Dr. Gilman was the prosecution’s star witness, testifying in detail about how he had shared confidential trial data with Martoma during their paid consultations. Martoma’s defense argued he was a talented analyst who succeeded through legitimate research and publicly available information. The jury was not persuaded. In February 2014, it returned a unanimous guilty verdict on all three counts. The conviction made Martoma one of eight SAC Capital employees found guilty of insider trading.⁵

Sentence and Where Martoma Is Now

On September 8, 2014, Judge Gardephe sentenced Martoma to nine years in federal prison, citing the staggering scale of the scheme.¹ The court also ordered him to forfeit $9.3 million, representing the personal bonus he received from the illegal trades, along with his interests in his Florida home and several bank accounts. Three years of supervised release were imposed to follow the prison term.

Martoma began serving his sentence in November 2014. He was released from federal custody around 2021 after serving approximately seven years, and he has since resided in Florida under ongoing SEC restrictions that bar him from the securities industry.

The Appeal and the Personal Benefit Question

Martoma’s appeal to the Second Circuit Court of Appeals became a vehicle for one of the most important legal debates in insider trading law: what “personal benefit” must a tipper receive for the tipping to be illegal? The question goes back to the Supreme Court’s 1983 decision in Dirks v. SEC, which held that a corporate insider who leaks confidential information breaches a duty only if the insider gains some personal benefit from the disclosure, and that only then can the person who trades on the tip be held liable.⁶

Newman Tightens the Standard

In December 2014, while Martoma’s appeal was pending, the Second Circuit decided United States v. Newman and imposed a stricter test for tipping liability. Newman required prosecutors to prove that the tipper received something of a “pecuniary or similarly valuable nature” in exchange for the tip and that the tipper and tippee had a “meaningfully close personal relationship.”⁷

Salman Overrules Newman

The Supreme Court resolved the split in December 2016 with Salman v. United States. The Court held that a tipper satisfies the personal benefit requirement simply by making “a gift of confidential information to a trading relative or friend,” even without receiving money or anything tangible in return, and it rejected Newman‘s requirement that the tipper receive something of a pecuniary or similarly valuable nature when gifting information.⁸

The Second Circuit Affirms the Conviction

In August 2017, the Second Circuit applied Salman to Martoma’s case and affirmed his conviction. The panel held that Salman had abrogated Newman‘s “meaningfully close personal relationship” requirement, and it found that even if the jury instructions had contained any error under Newman, the mistake was harmless because the government presented overwhelming evidence that Dr. Gilman received a financial benefit from his consultations with Martoma.⁹ Martoma petitioned the Supreme Court for certiorari, but the Court declined to hear the case, leaving his conviction and sentence intact.

What Happened to SAC Capital

The firm itself faced separate criminal charges. SAC Capital’s management companies pleaded guilty to securities fraud and wire fraud in connection with a pattern of insider trading that extended well beyond Martoma’s scheme, spanning more than a decade and involving the securities of over 20 publicly traded companies.⁵ The total financial penalty reached $1.8 billion, split between a $900 million criminal fine and a $900 million civil forfeiture judgment, making it the largest insider trading penalty in history at the time.¹⁰ As part of the plea, SAC Capital was required to stop accepting outside investor money, effectively shutting down its hedge fund operations. The firm later reconstituted as Point72 Asset Management, operating as a family office managing its founder’s personal wealth.

On the civil side, the SEC pursued a parallel action against CR Intrinsic Investors, which produced a fund of more than $601 million in disgorgement, prejudgment interest, and civil penalties to compensate harmed investors.¹¹

How the Case Changed Expert Networks

The Martoma prosecution changed how hedge funds interact with industry consultants. Before the case, expert network firms operated with relatively loose oversight, and portfolio managers routinely spoke with doctors, engineers, and executives who sometimes straddled the line between sharing expertise and leaking confidential information. The scale of the scheme made clear that these arrangements could produce catastrophic legal exposure.

In the years since, institutional expert networks have adopted layered compliance protocols designed to prevent the kind of information flow that occurred between Dr. Gilman and Martoma. These typically include conflict-of-interest screening, restrictions on consultants affiliated with public companies under active coverage, and requirements that experts sign attestations confirming they will not share material nonpublic information. Many firms now record consultations and conduct background checks on potential experts, disqualifying anyone with prior securities violations or fraud convictions.

1
United States Department of Justice. SAC Capital Portfolio Manager Mathew Martoma Sentenced in Manhattan Federal Court to Nine Years for Insider Trading
2
Federal Bureau of Investigation. Historic Insider Trading Scheme
3
U.S. Securities and Exchange Commission. SEC Charges Hedge Fund Firm CR Intrinsic and Two Others in $276 Million Insider Trading Scheme Involving Alzheimer’s Drug
4
U.S. Securities and Exchange Commission. CR Intrinsic Investors, LLC et al.
5
United States Department of Justice. SAC Capital Management Companies Sentenced in Manhattan Federal Court for Insider Trading
6
Justia U.S. Supreme Court Center. Dirks v. SEC, 463 US 646 (1983)
7
Justia Law. United States v. Newman, No. 13-1837 (2d Cir. 2014)
8
Justia U.S. Supreme Court Center. Salman v. United States, 580 US (2016)
9
Justia Law. United States v. Martoma, No. 14-3599 (2d Cir. 2017)
10
United States Department of Justice. Manhattan US Attorney Announces Guilty Plea Agreement With SAC Capital Management Companies
11
U.S. Securities and Exchange Commission. SEC Obtains Final Judgment Against Former Portfolio Manager for Insider Trading