In the SAC Saga, It’s Hard to Chase a Shadow

“How is the big guy?”

That was the question Phillipp Villhauer, the head of trading at SAC Capital Advisors, asked his assistant in an email as he headed to a meeting in New York on July 21, 2008. It was also the question hanging in the air of Room 110 in the federal courthouse in Manhattan over the last five weeks.

Mathew Martoma, a former SAC portfolio manager charged with insider trading, was sitting at the defendant’s table. But another man — much discussed in testimony, but never seen — seemed to overshadow the proceeding.

Steven A. Cohen. The Big Guy.

On Thursday, Mr. Martoma, 39, was convicted on charges of insider trading. He could be sentenced to 7 to 10 years in prison. Mr. Cohen, 57, the head of SAC, is still living in his 35,000-square-foot Greenwich, Conn., home, collecting works of art, including a Jeff Koons “Balloon Dog,” and, if all goes as expected, will still manage a firm, albeit one that trades only with his $9 billion personal fortune, rather than with other people’s money.

The jury verdict in the Martoma trial brings to eight the number of SAC-related convictions for Preet Bharara, the United States attorney for the Southern District. Last year, SAC itself agreed to plead guilty to insider trading charges and to pay a $1.2 billion penalty. But in a nearly decade-long pursuit by law enforcement, Mr. Cohen, one of Wall Street’s top stock traders and most successful hedge fund managers, has remained out of range.

The government’s obsession with Mr. Cohen came through in the testimony, offering the most dramatic sit-up-and-listen moment in the trial. Mr. Martoma was accused of using information provided by Dr. Sidney Gilman — a University of Michigan professor who had confidential results of a clinical trial of an Alzheimer’s drug — to make valuable trades in two drug companies. On cross-examination, Dr. Gilman volunteered that an F.B.I. agent told him in 2011 that he and Mr. Martoma were nothing more than a “grain of sand,” largely irrelevant to the investigation. The real target, Dr. Gilman said the agent had told him, was Mr. Cohen.

But even with Mr. Martoma under indictment, the government could get no closer to Mr. Cohen. Mr. Martoma would not cooperate with prosecutors, and with his conviction, say defense lawyers, former prosecutors and even some still in law enforcement, the investigation of the once wildly successful hedge fund seems to be winding down.

The trial of Mr. Martoma nonetheless offered a glimpse into the workings of SAC, and into the reverence in which Mr. Cohen was held at the firm. And, for the first time, it linked him to the questionable trades.

Earlier on that July day when Mr. Villhauer sent the “big guy” email, he received specific instructions from Mr. Cohen. Mr. Villhauer was to take steps to sell a large stock position that SAC had amassed in the pharmaceutical company Elan. (Later, the fund would also sell a large stake in Wyeth.) Mr. Cohen emphasized to Mr. Villhauer that the stock should be sold quickly and with “limited visibility,” so as not to raise eyebrows on Wall Street or even in the ranks of SAC’s roughly 900 employees.

Later, on his way to New York, Mr. Villhauer was curious about Mr. Cohen’s mood back at the firm’s offices in Stamford, Conn. His assistant responded that Mr. Cohen “seems mellow,” but quickly added, “he’ll probably blow” in a few hours.

Mr. Villhauer testified at Mr. Martoma’s trial that he had followed through on Mr. Cohen’s instructions, eventually locating some rarely used internal accounts at SAC that did not “have many eyes looking” at them from which to make the trades. The exercise took four days, he testified. Mr. Villhauer told the jury that, other than Mr. Cohen and Mr. Martoma, no more than a dozen people at SAC had even been aware of the trading — and most of those people reported to him.

Not even Mr. Cohen’s right-hand man, Chandler Bocklage, who sat next to Mr. Cohen for nearly a decade, knew about the Elan and Wyeth trades, Mr. Bocklage testified. He said he learned that the hedge fund had sold all its shares only when Mr. Cohen told him about it many days later.

The sale of Elan and Wyeth shares paid off. Elan announced on July 30, 2008, that a clinical trial had revealed potentially serious side effects with the experimental Alzheimer’s drug that the two companies were jointly developing. Shares of each company plummeted. By selling, SAC avoided potentially steep losses and generated profits totaling $275 million.

The federal jury in Manhattan found that the timing of SAC’s stock sales was no coincidence. The seven women and five men convicted Mr. Martoma of profiting from inside information provided by two doctors who were involved in the Alzheimer’s drug trial. One of them was Dr. Gilman, a paid consultant, who testified that he warned Mr. Martoma of potential trouble with the experimental drug a week before the results of the clinical trial were made public.

Prosecutors introduced evidence that a day before Mr. Cohen gave the instruction to begin dumping Elan shares, he was on the telephone for 20 minutes on a Sunday with Mr. Martoma. The call took place three days after Dr. Gilman first said he told Mr. Martoma about the problems with the clinical trial.

It is not known what the two men discussed during that Sunday call, but prosecutors inferred that they talked about Mr. Martoma’s change of heart about Elan. As Mr. Villhauer’s testimony made clear, Mr. Cohen’s fingerprints were all over the trade.

In his closing remarks, Richard M. Strassberg, a lawyer for Mr. Martoma, pointedly appealed to the jury not to convict his client as “a means to make a case against Steve Cohen.” He reiterated that Mr. Cohen had decided how the trading was done, not his client.

“Mathew Martoma is not Steven Cohen,” said Mr. Strassberg, jabbing his hand in the air to underscore the point. “Steven Cohen is not here.”

But he was, in a way. And having heard some of the evidence at Mr. Martoma’s trial, several securities lawyers said federal authorities might have been able to make a circumstantial case against Mr. Cohen based on the telephone call with Mr. Martoma and on the testimony that he directed the trading in the stocks. But without Mr. Martoma’s testimony, or other evidence directly showing that Mr. Cohen knew about the results of the clinical trial, a case might not have passed muster with a jury.

Federal authorities have said they are still investigating SAC, but with no new cases involving former or current employees, Mr. Cohen seems likely to avoid criminal prosecution. Moreover, the statutory period for bringing securities fraud charges on stock trades still under investigation will end this summer. Jonathan Gasthalter, a spokesman for Mr. Cohen and SAC, declined to comment.

Michael F. Bachner, a criminal defense lawyer and former federal prosecutor, said: “Even though Steven Cohen may have been doing the trading, the issue is one of the intent behind the trading, and it will always come down to what did Steve Cohen know.”

Getting at what Mr. Cohen knew is devilishly difficult. After all, this is a man known for caution and secrecy. Generally, the firm did not save most internal emails and instant-message communications before 2009. Even before the investigation became public in October 2009, Mr. Cohen would periodically have SAC offices checked for listening devices, said two people familiar with the matter. In the past, he would even buy up rights from photographers who took his picture, and, to this day, there are few publicly available photos of him.

Moreover, Mr. Cohen suspected that the government was listening in. He called a friend in the summer of 2009 to alert him to the possibility that a former associate of both men was surreptitiously taping phone calls in connection with an insider trading probe. That probably made him very careful about what he said. And a government wiretap placed on Mr. Cohen’s home phone that summer turned up no evidence of any wrongdoing, said people briefed on the matter but not authorized to speak publicly.

Some in law enforcement speculate that Mr. Martoma, who has resisted repeated overtures from the government to cooperate, might be inclined now to tell all about his July 20 telephone conversation with Mr. Cohen in a bid for leniency.

Mr. Martoma certainly has reason to cut a deal before his sentencing on June 10. He and his wife, Rosemary, a pediatrician, have three children, and he will also face the forfeiture of a significant part of the family’s assets. But lawyers noted that his bargaining position was stronger before the trial and especially before it emerged that he was expelled from Harvard Law School in 1999 for doctoring his transcript.

Mr. Martoma’s cheating at Harvard was not introduced as evidence to the jury. But if he were to become a witness against Mr. Cohen, it could be used to discredit him. And there is the inconvenient fact that, throughout the trial, Mr. Strassberg maintained that Mr. Martoma had done nothing wrong.

“It wouldn’t be a cakewalk,” said Richard J. Holwell, a former federal judge who presided over the insider trading trial and conviction of the hedge fund billionaire Raj Rajaratnam and is now partner at Holwell Shuster & Goldberg. But if Mr. Martoma were able provide prosecutors with direct evidence against Mr. Cohen, “certainly his credibility is going to be severely damaged,” Mr. Holwell added.

Several defense lawyers said Mr. Martoma’s testimony is not worth much to prosecutors now unless he has some email, document or other piece of physical evidence to support any version he would present of his conversation with Mr. Cohen.

Then again, Mr. Martoma could have nothing to offer. The 20-minute conversation with Mr. Cohen could have been about anything. Or nothing more than Mr. Martoma telling his boss that he was no longer bullish on Elan and the Alzheimer’s drug. After all, other portfolio managers and health care analysts at SAC did not share Mr. Martoma’s enthusiasm for the experimental drug. So maybe Mr. Cohen decided that it was simply time to bail.

Mr. Martoma told his own team of analysts and traders that he made his decision to get out of the stocks by simply looking at his notes.

As Mr. Bocklage, who helped Mr. Cohen trade his own portfolio for a decade, testified: No one at SAC would ever question the hedge fund boss on a trade. “I personally think that Steve is the greatest trader of all time,” Mr. Bocklage added on the stand.

Certainly, plenty of people on Wall Street still agree. SAC, in fact, is hiring, recently interviewing for an analyst position. People still want to work there. The Big Guy might be in a pretty good mood.