Prosecutors never thought their insider trading case against Mathew Martoma would go to trial.
Certain that he possessed a rich vein of information on his former employer, SAC Capital Advisors, the prosecutors pressed Mr. Martoma for two years to cooperate in the long-running investigation of the hedge fund’s owner, Steven A. Cohen. Mr. Martoma, a 39-year-old trader who, if convicted, is staring at decades in prison away from his wife, Rosemary, and their three young children, appeared to have every incentive to cut a deal against a boss who fired him in 2010.
But when F.B.I. agents first confronted Mr. Martoma on a November 2011 evening on the front lawn of his $1.9 million Boca Raton, Fla., home, telling him they wanted to talk “about insider trading” at SAC, he was so overcome with stress that he briefly fainted. After regaining composure with help from his wife, a pediatrician, Mr. Martoma turned the agents away, saying he would “obtain a lawyer.”
In at least three meetings since, people briefed on the case said, when prosecutors subtly raised the subject of Mr. Martoma striking a cooperation deal, his lawyers insisted he would not play ball. And finally, when prosecutors set a deadline last year for him to cooperate, the people said, the date came and went without Mr. Martoma budging.
Prosecutors had long hoped Mr. Martoma would provide the missing link in their pursuit of Mr. Cohen, an inquiry that has hit one dead end after another.
But now Mr. Martoma is heading to trial. On Tuesday, jury selection will begin in Federal District Court in Lower Manhattan, where prosecutors have built an undefeated record in insider trading trials under the United States attorney in Manhattan, Preet Bharara.
Mr. Martoma’s resistance, the people briefed on the matter say, has baffled officials at the F.B.I., the United States attorney’s office and the Securities and Exchange Commission. Some authorities have grown suspicious about his motives, the people say, noting that Mr. Cohen is paying for Mr. Martoma’s defense.
Richard M. Strassberg, a lawyer for Mr. Martoma, said last week that his client “continues to fight these charges” and will do so at trial.
Coming on the heels of last month’s insider trading conviction of another SAC employee, Michael S. Steinberg, and SAC’s guilty plea in November to insider trading charges, the trial could become yet another embarrassing episode for Mr. Cohen and his hedge fund. The trial, which is expected to last nearly a month, will shed light on Mr. Cohen’s role in the trades at the center of the cases.
A spokesman for Mr. Cohen, 57, declined to comment on the trial.
In the indictment, which accused Mr. Martoma of obtaining secret information from a doctor about clinical trials for an Alzheimer’s drug, prosecutors for the first time cited trades that directly involved Mr. Cohen. Just after Mr. Martoma learned that the trials produced negative results, he spent 20 minutes on the telephone with Mr. Cohen, the fund’s billionaire founder who has long been a focus of the federal government’s investigation. A day later, SAC dumped its shares in the two companies developing the drug, Elan and Wyeth, a move that the authorities say helped Mr. Cohen’s firm avoid losses and generate profits totaling $276 million.
Mr. Bharara called it “the most lucrative insider trading scheme ever charged.”
But his office stopped short of implicating Mr. Cohen, or claiming that Mr. Martoma told his boss about the secret information. In a sworn deposition with the S.E.C., which is also investigating SAC, Mr. Cohen said he sold the drug stocks after Mr. Martoma said he had lost conviction about the investments.
Mr. Cohen, who has not been charged with any criminal wrongdoing, is facing a civil action from the S.E.C. The agency accused Mr. Cohen of failing to supervise employees like Mr. Martoma.
Mr. Martoma’s case — which involves one count of conspiracy and two counts of securities fraud, charges that could carry a 45-year prison sentence — hinges on the testimony of two doctors involved in the clinical trial. The government’s star witness is Dr. Sidney Gilman, an 81-year-old retired University of Michigan professor who was a paid consultant to Elan.
Over the course of two years, Dr. Gilman formed a relationship with Mr. Martoma, with the doctor serving as something of a mentor. Mr. Martoma, the authorities say, arranged for 42 discussions with Dr. Gilman, who earned $108,000 through a consulting firm for his advice to SAC.
The turning point came on July 17, 2008, prosecutors say, when Dr. Gilman received an email from Elan titled “Confidential, do not distribute.” After receiving the email, which raised “significant questions” about the effectiveness of an Alzheimer’s drug named bapineuzumab, Dr. Gilman had a nearly two-hour phone call with Mr. Martoma. Prosecutors also contend that Mr. Martoma then flew to Ann Arbor, Mich., to meet with Dr. Gilman on July 19, 2008.
The next day, on a Sunday morning, Mr. Martoma emailed Mr. Cohen, telling him “it’s important” that they speak. They chatted by phone shortly thereafter, according to the indictment, and on Monday, SAC “sold virtually all” of its stake in Elan and Wyeth.
The timely trading helped avert a major loss for SAC at the height of the financial crisis. In 2008, SAC’s returns were down 19 percent, the only negative year in the 22-year history of the hedge fund. Mr. Martoma reaped a handsome reward: a $9.3 million bonus.
But in 2010, SAC let Mr. Martoma go, with one executive describing him as a “one-trick pony with Elan.”
To counter the prosecution’s case, Mr. Martoma’s lawyers are likely to question the motives of both doctors. Dr. Gilman did not initially implicate Mr. Martoma, Mr. Strassberg has noted in court filings, denying in late 2011 and early 2012 that he had passed inside information. Dr. Gilman and another doctor, Dr. Joel Ross, a New Jersey physician, later changed their stories, Mr. Strassberg said in a court filing, and received nonprosecution agreements “in exchange for their cooperation.” (Dr. Ross is also expected to testify in the trial.)
Mr. Strassberg might also seek to highlight the fact that prosecutors lack any email evidence that Dr. Gilman forwarded the clinical drug trial information to Mr. Martoma. Prosecutors and regulators initially claimed that Dr. Gilman forwarded a copy of Elan’s presentation to Mr. Martoma, but that accusation was eliminated in a revised indictment.
Marc L. Mukasey, the lawyer for Dr. Gilman, said that when his client “is called to testify, he will do so in accordance with his nonprosecution agreement.”
Although prosecutors have told Mr. Martoma and his lawyer that it is too late to cut a deal, some law enforcement officials are interested in talking to him even if he is convicted. But defense lawyers said that postconviction cooperation often would not earn a defendant the same kind of sentencing leniency.
The lawyers also said that the evidence against Mr. Martoma, which began with a referral from the New York Stock Exchange to the S.E.C. about suspicious trading in shares of Elan and Wyeth, looks more convincing than the case prosecutors presented against Mr. Steinberg. And it took a jury just two days to convict Mr. Steinberg on insider trading charges following a four-week trial.
Mr. Martoma’s wife attended a few days of Mr. Steinberg’s trial, even though the families are not known to be friendly. In the weeks after the trial, court records show, Mr. Martoma was allowed to take family trips to Yellowstone National Park, Atlanta and a wedding in Chicago.
The Martoma trial comes as SAC, which is in the process of returning outside money to investors and converting to a family office that will manage about $9 billion of Mr. Cohen’s money, posted a 20 percent return for 2013, roughly double the industry’s average return.
The trial also coincides with a Jan. 7 broadcast of a “Frontline” documentary program that focuses on the government’s insider trading investigation. The program, produced for PBS, features an interview with the F.B.I. agent B. J. Kang, one of the two agents who approached Mr. Martoma on his lawn two years ago.
In a ruling on Monday, the judge presiding over the trial, Paul G. Gardephe, barred prosecutors from introducing evidence of Mr. Martoma’s fainting spell. But he decided to allow prosecutors to use the word “greed” during the trial, despite concerns raised by Mr. Strassberg that the word could be used as a way to “tap into the anger out there against Wall Street.”
Alexandra Stevenson contributed reporting.