By Reynolds Holding
NEW YORK, Nov 27 (Reuters Breakingviews) - It's almost
criminal that the snitch will walk in a probe involving SAC
Capital. Mathew Martoma, an ex-trader at Steve Cohen's $14
billion hedge fund firm, faces possible jail time for alleged
insider trading. But the doctor accused of giving him secret
data doesn't - he won't be charged after agreeing to help
prosecutors. Flipping suspects to land bigger game is standard.
Going easy on serious wrongdoing shouldn't be.
Martoma's alleged crimes stand out even among the scores of
recent insider-trading prosecutions. He's accused of illegally
helping SAC reap $276 million in profits made and losses
avoided, a record amount for such cases. Enforcers say his
recommended trades came after consultations with Cohen. Though
the hedge fund titan isn't accused of wrongdoing, it's the first
time he has been linked to suspicious transactions.
Almost lost in the hoopla, however, is the snitch at the
heart of the alleged scheme. Sidney Gilman, a neurology
professor, consulted with Elan and Wyeth on an Alzheimer's drug
the two developed, chaired the committee overseeing the drug's
safety and sold investors his expertise through a research firm.
In each case, he explicitly promised not to reveal confidential
information. Yet according to prosecutors he repeatedly broke
that promise by passing tips to Martoma.
As U.S. Judge Jed Rakoff recently explained in sentencing
former McKinsey boss and Goldman Sachs director Rajat Gupta for
insider trading, that crime is based on a breach of trust:
revealing a company's secrets. Trading on those secrets is a
necessary but almost incidental element of the crime, in the
sense that the breach must come first.
Yet prosecutors seem to have things backwards. In the
Martoma case, they are pursuing the trader while settling on
favorable terms with Gilman, who allegedly violated his
employers' trust. And in seeking a stiff sentence for Gupta,
they stressed the money that traders made from his tips rather
than his disloyalty in revealing Goldman's secrets.
Their tactics are understandable, to a point. The federal
sentencing guidelines punish lucrative but illegal trades more
harshly than breaches of confidence. And insider-trading doctors
probably draw fewer headlines than high-profile hedgies. But
prosecutors have broad discretion in choosing whom to pursue.
The SAC probe suggests that they don't always use it wisely.
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
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