Why the Snitch in the Insider Trading Probe Shouldn't Go Free

Agenda-Setting Financial Insight.
Nov. 27 2012 5:24 PM

Why the Snitch in the Insider Trading Probe Shouldn't Go Free

Former hedge fund portfolio manager Mathew Martoma exits a New York federal court after being charged in one of the biggest insider trading cases in history.

Photo by Spencer Platt/Getty Images

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.)

Read more at Reuters Breakingviews.


Medical Examiner

Here’s Where We Stand With Ebola

Even experienced international disaster responders are shocked at how bad it’s gotten.

It Is Very, Very Stupid to Compare Hope Solo to Ray Rice

The U.S. Is So, So Far Behind Europe on Clean Energy

Even if You Don’t Like Batman, You Might Like Gotham

Friends Was the Last Purely Pleasurable Sitcom

The Eye

This Whimsical Driverless Car Imagines Transportation in 2059


Meet the New Bosses

How the Republicans would run the Senate.

A Woman Who Escaped the Extreme Babymaking Christian Fundamentalism of Quiverfull

So, Apple Is Not Shuttering Beats, but the Streaming Service Will Probably Be Folded Into iTunes

  News & Politics
Sept. 22 2014 6:30 PM What Does It Mean to Be an American? Ted Cruz and Scott Brown think it’s about ideology. It’s really about culture.
Sept. 22 2014 5:38 PM Apple Won't Shut Down Beats Music After All (But Will Probably Rename It)
Sept. 22 2014 4:45 PM Why Can’t the Census Count Gay Couples Accurately?
  Double X
Sept. 22 2014 4:06 PM No, Women’s Soccer Does Not Have a Domestic Violence Problem Or, why it is very, very stupid to compare Hope Solo to Ray Rice.
  Slate Plus
Slate Plus
Sept. 22 2014 1:52 PM Tell Us What You Think About Slate Plus Help us improve our new membership program.
Brow Beat
Sept. 22 2014 5:45 PM The University of California Corrects “Injustice” by Making Its Rich Chancellors Even Richer
Future Tense
Sept. 22 2014 6:27 PM Should We All Be Learning How to Type in Virtual Reality?
  Health & Science
Medical Examiner
Sept. 22 2014 4:34 PM Here’s Where We Stand With Ebola Even experienced international disaster responders are shocked at how bad it’s gotten.
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.