Trading with élan
The trial of former SAC analyst Mathew Martoma began today. Prosecutors say the case is “not about science or trading… The case is about cheating”. Martoma’s lawyer countered that the government has simply charged an innocent person. “This case is like ‘The Exonerated’”, he said.
The prosecution’s case is that Martoma allegedly got information about an Alzheimer’s drug’s clinical trials from a doctor working on the trials. Martoma then allegedly used this information to recommend SAC short shares of the drug’s developers, Elan and Wyeth, netting $276 million for SAC when the shares slumped. The defense counters that there were many reasons to sell or short Elan and Wyeth, and that “insider trading is not one of them”. The prosecution, they say, is overly dependent on the doctor who allegedly gave Martoma the trial results and who has since been pressured, they claim, into cooperating with the government in exchange for immunity.
DealBook’s Matthew Goldstein and Alexandra Stevenson report that Martoma was expelled from Harvard Law for electronically altering his transcript, sending the forged document to 23 judges, and then fabricating emails and creating a “counterfeit report from a computer forensics firm” to conceal his actions. Alex Tabarrok points out that Martoma previously worked as a medical ethicist at the NIH, and that an undergraduate professor wrote in a letter of recommendation that “no one has contributed more to our class discussions of Sissela Bok’s Lying, nor was anyone in our class as acute on the issues of moral capacity raised by Camus’ The Plague”.
Martoma’s spokesman calls raising the expulsion a “transparent effort by the government to unduly influence the ongoing court proceedings”. Matt Levine reviews prosecutors’ motion to admit evidence of Martoma’s past and is unimpressed. The episode, Levine writes, “is truly, genuinely nuts”, and that’s precisely why it should be excluded: “Prosecutors should have to prove beyond a reasonable doubt that he actually did the thing they’re charging him with — not just rely on evidence of his general crookedness”.
The prosecutors assert that the facts around Martoma’s expulsion are germane: they claim it shows that he had the technical skills to delete records of him receiving inside information. White Collar Wire’s Jack Sharman points out that “such questions are usually handled at trial by each side offering computer-forensic experts”. The expulsion, Sharman writes, does little to inform the jury, and a lot to prejudice their view of Martoma. When treated as character evidence, he says, it fails to point to motive or intent.
Unfortunately for Martoma, the government has a very good record of winning insider trading cases of late. — Ben Walsh
On to today’s links:
Is Larry Summers right that we’re facing “secular stagnation”? – John Cassidy
Why market failures underlie our fears of “secular stagnation” – Brad DeLong
The most damning critique of DSGE – Noah Smith
“Saltwater DSGE macro, as best as I can tell, is just a kind of highbrow trolling” – Matt Yglesias
Tax price, not value – Steve Waldman