Cohen Wanted Trades Hidden From SAC Employees
Trader Testifies He Was Directed to Limit Visibility of Trades in Pharmaceutical Companies
When SAC Capital Advisors LP began unloading a massive position in two pharmaceutical companies in July 2008, Steven A. Cohen didn't want anyone to know, including his own employees, the firm's top trader told jurors Tuesday.
The trader, Phillipp Villhauer, testified that SAC's billionaire founder directed him to limit the "visibility" of the trading as much as possible. Mr. Villhauer said he followed his boss's instructions to the letter, shielding a set of trades now at the heart of the insider-trading trial of former SAC portfolio manager Mathew Martoma from investors inside and outside the hedge fund.
The effort to hide trades isn't illegal. In fact, it is common among institutional investors. But prosecutors say some of the methods used were "abnormal," and help support their allegations that Mr. Martoma's intentions were not "purely benign."
"[S]imply because the means used to hide the sales of Elan internally were lawful and could serve valid ends…does not mean that such techniques could not simultaneously serve more nefarious ends, such as minimizing the risk that SAC Capital's trading would be flagged by a counterparty as suspicious," prosecutors wrote in a court filing last month.
On cross-examination by Mr. Martoma's lawyers, Mr. Villhauer testified that SAC frequently obscured its positions from other investors to avoid any "slippage"--that is, preventing other entities from learning that SAC was selling large volumes, thereby causing prices to drop.
Mr. Martoma, 39 years old, is accused of using inside information to make trades on Elan Corp., now part of Perrigo Co. PRGO +2.43% , and Wyeth Pharmaceuticals, now part of Pfizer Inc., PFE +2.56% that netted SAC $276 million in profits and avoided losses. He has pleaded not guilty.
Prosecutors allege the cause of the massive selloff in July 2008 was inside information Mr. Martoma obtained from two doctors, who told him the undisclosed results of a clinical trial of an Alzheimer's drug being developed by Elan and Wyeth.
Mr. Cohen hasn't been accused of any criminal wrongdoing. A spokesman for Mr. Cohen and SAC didn't have an immediate comment.
On Tuesday, prosecutors questioned Mr. Villhauer about two trading accounts that only a handful of SAC employees could access. Mr. Villhauer said that after he got his directive from Mr. Cohen, he called the firm's operations offices and asked them to find accounts that didn't have "many eyes" on them.
"[O]bviously no one knows except you me and Steve," Mr. Villhauer wrote to Mr. Martoma on July 21, 2008, as he began selling off SAC's position, according to an email shown by the prosecution to jurors on Tuesday.
Over the next week, Mr. Villhauer sold off over 10.5 million shares of Elan them from a handful of "visible" accounts, including the personal accounts of Messrs. Cohen and Martoma. But he booked the new positions, which were now short, or a bet the stock would decline, into the two "limited visibility" accounts.
Of the roughly 900 employees at SAC in 2008, Mr. Villhauer estimated only 10 to 15 people were aware of the trades.
"This was executed quickly and efficiently over a four-day period through algos and dark pools and booking into two firm accounts that have very limited viewing access," Mr. Villhauer wrote to Mr. Cohen at the end of July.
Mr. Martoma's trial is in its fourth week, and prosecutors closed their case Tuesday afternoon. Mr. Martoma's lawyers have attacked the credibility of the two doctors who allegedly tipped Mr. Martoma, both of whom testified against him, and have argued the trades weren't the result of Mr. Martoma's tips. They are expected to put on a short defense case, and called SAC's general counsel, Peter Nussbaum, to testify Tuesday.
SAC pleaded guilty to insider trading last year, agreeing to pay $1.2 billion in fines. Seven current and former SAC employees have pleaded guilty to, or been convicted of, insider trading.