In April 2008, three months before drug makers Elan Corp. and Wyeth were scheduled to release results of their Alzheimer’s drug trial, two health-care analysts for hedge-fund manager Steven A. Cohen warned their boss in an e-mail that a doctor, who implied he had seen inside information about the trial, said it wasn’t going well.
Cohen, who had bought shares of both companies on the advice of Mathew Martoma, one of his health-care portfolio managers, shot back with a question: How would any doctor know interim results? The analysts, who were bearish on Elan and Wyeth, replied that the doctor said he had seen the data before agreeing to be part of the trial. The information, the analysts said, was better than Martoma’s, according to an order filed last week by U.S. regulators against Cohen for what they said was failure to supervise his employees.
Cohen forwarded the e-mails to Martoma, who was bullish on the stocks, asking him to follow-up with the unnamed doctor. Martoma, who for the past year had been getting illicit tips from a second doctor involved in the drug trial, complied and a few days later answered that it was a “non issue,” according to the U.S. Securities and Exchange Commission order. For the time being, Cohen and Martoma stuck with their bets on the stocks.
This exchange, one of many detailed in the SEC’s administrative order, shows how the notorious eat-what-you-kill culture that Cohen created at SAC Capital Advisors LP may have led some of its traders to break the law. The 57-year-old billionaire, who pitted his employees against one another to come up with the best trading ideas, turned a blind eye to their use of illicit information, the SEC said. The agency seeks to bar Cohen from managing money for investors, which would put him out of business after producing the industry’s best stock-trading record over more than 20 years.
“The very nature of the culture at SAC led to his tremendous success in generating performance and raising assets for many years,” said Jay Rogers, president of Irvine, California based Alpha Strategies Investment Consulting Inc., which advises hedge-fund clients and managers. It appears “it also led some within the organization to take shortcuts.”
The SEC’s order, the first action against Cohen personally in the government’s multiyear insider-trading investigation, falls short of accusing him of securities fraud. The failure to supervise claims, which relate to Cohen’s oversight of Martoma and portfolio manager Michael Steinberg’s trading in Dell Inc., will be heard by an administrative judge within the SEC, not in a federal court like civil or criminal insider-trading allegations would. A criminal investigation by the U.S. attorney’s office in Manhattan and the Federal Bureau of Investigation continues, as does the SEC’s probe.