Steven A. Cohen's SAC Capital Advisors LP is at the center ofthe biggest insider case ever filed in a sweeping U.S. crackdown onillicit hedge fund trading — one that focuses on the burgeoningexploitation of secret information on volatile health carestocks.

In doing so, the new case against a former Cohen lieutenant hasbrought the five year probe beyond the realm of technology stocksand into the busy underworld of health care industry securitiesfraud. The charges against former SAC portfolio manager MathewMartoma also place U.S. prosecutors closer than ever to Cohen, thehedge fund's billionaire owner and founder, in the broadest probeof insider trading in a generation.

Martoma, 38, was accused by prosecutors in Manhattan federalcourt with playing a lead role in what they called the mostlucrative insider-trading scheme in history, given the $276 millionprofit he allegedly helped the hedge fund achieve. Martomaparticipated in trading on insider tips about clinical trials of adrug to treat Alzheimer's disease, the U.S. said, and advised Cohento sell shares of Wyeth LLC and Elan Corp. before bad news aboutits prospects was announced. The government referred to the“hedge-fund owner” in court papers.

“It appears that the government is sending the message that theybelieve the owner of the hedge fund is acting alongside Mr.Martoma,” Brad Simon, a former federal prosecutor now in privatepractice in New York, said yesterday in a phone interview. “Thiswould indicate to me that the government's investigation is movingup the chain at a very rapid pace.”

Health-care businesses offer illegal traders more opportunitiesto profit than the finance and technology sectors that havetraditionally been prime victims of insiders who leakedconfidential data about earnings or deals.

Health companies can live or die on the results of drug trials,which stretch for years before regulators make decisions that cantrigger hundreds of millions of dollars in profits or losses. Andthe industry has undergone significant consolidation, leading toseveral multibillion-dollar mergers.

More than 80 people have been sued by regulators or charged byprosecutors since 2008 for passing or getting inside tips aboutpharmaceutical, biotechnology or other health-care stocks.

The lineup of accused health-industry insider traders includeschief executive officers, hedge fund traders, bankers, lawyers,doctors, accountants, a retired commercial airline pilot, a filmproducer and a member of Major League Baseball's Hall of Fame. Ithas touched the Food and Drug Administration and large health-carecompanies such as Bristol-Myers Squibb Co. and AbbottLaboratories.

Urged Cohen

Martoma, according to prosecutors, urged Cohen to buy Wyeth andElan shares based on good news about the Alzheimer's drug trial,then advised him to liquidate SAC's $700 million position aftergetting a secret tip that the trial had gone badly.

Cohen's firm made huge profits or avoided losses after receivingthe advice from Martoma to sell Wyeth and Elan shares, prosecutorssaid in the complaint. Martoma is charged with conspiracy andsecurities fraud, which carries a maximum 20-year prison term.Prosecutors don't say in the complaint whether Cohen knew Martoma'sadvice was based on illegal tips. Neither Cohen nor SAC Capital wascharged or sued over the matter.

The U.S. may be seeking to persuade Martoma to assist in a probeof others at SAC, said Andrew Frisch, a defense attorney in NewYork and former federal prosecutor.

“That they're proceeding by a complaint, as opposed to anindictment, often means the government wants to convince thedefendant of the wisdom of cooperation,” Frisch, who isn't involvedin the case, said in an interview. “Cooperation is always apossibility for a defendant, but it's a question of whether he hasinformation.”

“Perhaps the government is in plea negotiations and by having acriminal complaint this buys him more time,” Simon said. “With acriminal complaint they don't have to use a grand jury, this givesthem more flexibility, they can work out a plea and avoid theentire grand jury process. It doesn't lock the government in.”

Martoma is the latest current or former SAC employee implicatedin alleged insider trading by U.S. prosecutors, including formerportfolio managers Noah Freeman and Donald Longueuil and analystJon Horvath.

SAC Capital

Cohen, 56, started SAC Capital in 1992 and his hedge fundmanages $14 billion. He has been deposed by SEC investigators abouttrades made close to news such as mergers and earnings thatgenerated profit for his fund, a person familiar with the mattersaid in June. The person asked not to be identified because theinvestigation wasn't public.

“Mr. Cohen and SAC are confident that they have actedappropriately and will continue to cooperate with the government'sinquiry,” Jonathan Gasthalter, a company spokesman, said yesterdayin an e-mailed statement.

Martoma worked as a portfolio manager for CR Intrinsic Investorsin Stamford, Connecticut, a unit of SAC Capital, the U.S.Securities and Exchange Commission said in a lawsuit it filedagainst him yesterday in New York. In addition to Martoma, the SECnamed as defendants CR Intrinsic and Sid Gilman, a University ofMichigan neurologist who was the chairman of a safety-monitoringcommittee that oversaw a clinical trial of the Alzheimer's drug,bapineuzumab, or bapi. Gilman wasn't charged in the case.

Martoma was arrested at his home in Boca Raton, Florida, at 6:30a.m. yesterday, said Peter Donald, a spokesman for the FederalBureau of Investigation in New York. He appeared before U.S.Magistrate David Brannon in West Palm Beach and was released on $5million bond secured by two family members, said Mary Delsener, aspokeswoman for Manhattan U.S. Attorney Preet Bharara. Martoma isscheduled to be in federal court in Manhattan on Nov. 26, Bhararasaid at a press conference yesterday.

“Mathew Martoma was an exceptional portfolio manager whosucceeded through hard work and the dogged pursuit of informationin the public domain,” his lawyer, Charles Stillman, said in ane-mailed statement yesterday. “What happened today is only thebeginning of a process that we are confident will lead to Mr.Martoma's full exoneration.”

The SEC claimed Martoma, who specialized in health-care stocks,used Gilman's illegal tips to trade for CR Intrinsic as well as for“hedge fund portfolios managed by an affiliated investment adviser”and controlled by an unidentified “Portfolio Manager A.” Thatmanager was Cohen, according to a person familiar with thematter.

'Unholy Alliance'

“In this instance, what we see is an unholy alliance between aninsider willing to divulge valuable, nonpublic information and amoney manager who knew that information is as good as gold,” AprilBrooks, an FBI agent in charge of the New York office's criminaldivision, said at the news conference yesterday.

“Martoma and the owner of the hedge fund that employed himtraded heavily and aggressively on the expert's information basedon inside information in advance of the favorable announcement,”Brooks said

Gilman, 80, is a professor of neurology at the University ofMichigan Medical School. He has entered into a non- prosecutionagreement with prosecutors in which he agreed to testify before afederal grand jury and to forfeit $186,761, money which he was paidby Elan for his consulting work.

“He is cooperating with the SEC and the U.S. Attorney's Office,”Marc Mukasey, Gilman's lawyer, said. “We expect to settle with theSEC in short order.”

The doctor met Martoma as a consultant for an expert- networkingfirm based in Manhattan and had sessions with Martoma from mid-2006to July 2008, according to the government.

Gilman worked for Gerson Lehrman Group's Scientific AdvisoryBoard starting in 2002, according to a 2011 curriculum vitae postedonline by the University of Michigan.

Loren Riegelhaupt, a spokesman for the New York-basedexpert-networking firm, declined to comment on the case. BloombergLP, the owner of Bloomberg News, has an agreement to offer itsclients access to Gerson Lehrman consultants.

Over the course of about 42 consultations, Martoma persuaded thedoctor to talk about his work on the drug trial, Bharara said.

Passed Along

The doctor passed along the generally positive safety data aboutthe trial, according to the criminal complaint, which doesn'tidentify the neurologist by name. The SEC's complaint names Gilmanas Martoma's source.

Relying on the safety data, Martoma allegedly bought shares ofElan and Wyeth for his portfolio. Cohen also bought Elan and Wyeth,based on Martoma's recommendation, prosecutors said. By the end ofJune 2008, SAC held about $700 million in the two companies'stocks.

“The hedge fund built up over time a massive position in Elanand Wyeth stock. The hedge fund built up this position, even thoughit was vocally opposed by several others at the hedge fund who wereworried about the risk of that investment,” Bharara said. “Martomawas the only person at the hedge fund who was recommendingestablishing such a large position in Elan and Wyeth based on thatdrug.”

In mid-July 2008, Gilman received secret data showing thatbapineuzumab failed to halt progression of Alzheimer's in patientsin the clinical test, the U.S. said. The doctor e- mailed Martoma a24-page PowerPoint presentation detailing the results, which he wasscheduled to present at a medical conference on July 29, accordingto the U.S.

“That is when Martoma, according to the complaint, had to do aspectacular about-face, because he understood that with thesenegative results looming, the hedge fund's massive $700 millionstake had become a terrible bet,” Bharara said. “Overnight, Martomawent from bull to bear as he tried to dig his hedge fund out of amassive hole.”

Prosecutors said that on July 20 Martoma e-mailed Cohen to ask,“Is there a good time to catch up with you this morning? It'simportant.” The two later talked for about 20 minutes, according tothe complaint.

After that conversation, SAC allegedly sold all its Elan sharesand shorted the stock in a little more than a week. SAC alsoliquidated most of its Wyeth stock and took short positions, theU.S. said.

During that time, SAC's Elan trades accounted for morethan one-fifth of its trading volume, Bharara said.

'Senior Trader'

On July 27, an unidentified “Senior Trader” at Martoma's companye-mailed Cohen about the week's trading activity, according toprosecutors.

The e-mail said that the fund “executed a sale of over 10.5million ELN” for four internal hedge fund accounts. The sales werecarried out “quietly and effectively” over four days through darkpools and other means, and booked into accounts that had “verylimited access,” according to the e- mail cited in the criminalcomplaint.

After the results became public, Wyeth and Elan sharesplummeted. Wyeth, which is now owned by Pfizer Inc., fell the mostin almost six years on the news. Elan dropped the most in threeyears.

Prosecutors said Martoma was paid a bonus of $9.38 million inJanuary 2009, based largely on the hedge fund's profit from theWyeth and Elan trades.

Martoma lost money in the next two years and was fired afteranother unidentified employee said in a May 2010 e-mail that he wasa “one-trick pony with Elan,” according to the government.

In addition to the former SAC employees who have been chargedcriminally, Michael Steinberg, a portfolio manager at SAC's SigmaCapital Management unit, has been described by federal prosecutorsas an “unindicted co-conspirator” of Horvath, a former analyst hesupervised who pleaded guilty to receiving and passing insideinformation. Longueuil, who worked for CR Intrinsic in New Yorkfrom July 2008 to July 2010, was accused of giving information toFreeman, his friend.

In April 2011, former SAC analyst Jonathan Hollander agreed tosettle SEC allegations that he traded on inside information about apending takeover of the Albertson's LLC grocery chain.

The criminal case is U.S. v. Martoma, 12-MAG-2985; and the civilcase is SEC v. CR Intrinsic Investors LLC, 12-8466, U.S. DistrictCourt, Southern District of New York (Manhattan).

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