Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street

by Sheelah Kolhatkar

  By the time Wadhwa got a call from the SEC’s enforcement chief about it, the Grassley campaign was threatening to escalate into a full-blown scandal.

  “We have got to get ahead of this,” Wadhwa’s boss told him. “Can you look into it?”

  —

  After hearing from the SEC about the Gilman-Martoma connection to the Elan case, the head of the securities unit at the U.S. Attorney’s Office agreed that it was time to look again at what the SEC had found. Two criminal prosecutors, Avi Weitzman, who was working on the Noah Freeman and Donald Longueuil cases, and Arlo Devlin-Brown, who was in the middle of a high-profile case involving illegal Internet gambling sites, walked over to the SEC’s offices. B. J. Kang came, too.

  Charles Riely still wasn’t positive about what had happened with Elan, but he had a theory. He tried to describe the criminal conspiracy as clearly as he could. “We think it’s most likely that Gilman, or another doctor, tipped Martoma,” he said. It was famously difficult to build an insider trading case on circumstantial evidence alone, but every new document that came in supported the narrative that was emerging. Riely felt in his bones that this was going to be a huge case.

  To everyone in the room, the link seemed obvious: There was a major drug announcement that caused a stock to plunge; that announcement was made by a doctor who had access to the information well in advance; that doctor had been paid a fortune to consult with a trader at SAC, who was paid a fortune by Cohen, who made millions of dollars trading the stock the week before the news came out. It was like Occam’s razor, or the law of parsimony: Among competing hypotheses, the simplest one was usually correct. Any other explanation defied common sense.

  “Guys,” Wadhwa said to the prosecutors. “This is a really important case. If you don’t start doing something, we’ll have to go forward alone.” He couldn’t have cared less about Martoma personally, he added. The big catch here was Cohen.

  “You’re right,” said the head of the securities unit. “We need to move on this.”

  Kang had to leave the meeting early, but he had heard enough to be convinced about Elan. He had developed a skeptical view of what was happening on Wall Street, to put it mildly. He’d heard over and over from his cooperators and sources that cheating was rampant. When the incentives were so huge and you had so many funds competing to the death—all of them with the same Wharton-trained wizards on staff, the same state-of-the-art technology systems, the same expert network consultants, the same greed and determination—how else could you rise above everyone else and beat the market year after year? In the Galleon case, they had charged Raj Rajaratnam and a few others over eleven trades and alleged a $64 million illegal profit. With Elan and Wyeth, the profit was four times as large.

  The FBI finally had a live lead, Gilman, who was ready for an approach.

  —

  When Kang got back to his office, he plugged Martoma’s Social Security number into the FBI’s database. It turned out that Mathew Martoma had a particular status called “known to the Bureau.” He had apparently been interviewed by an FBI agent in 2000 as a potential witness in connection with a separate fraud investigation.

  Something else showed up, too: Martoma was not his real name. In the early part of his life, he was known as Ajai Thomas. That was the name that appeared on the old FBI notes from the previous case. It struck Kang as strange.

  Even more intriguing, there was a reference in the old interview notes to Martoma having to leave Harvard Law School abruptly. Kang immediately shared it with the prosecutors, Devlin-Brown and Weitzman. They had both gone to Harvard Law School, too. They were apparently there at the same time as Martoma. The prosecutors made a note to look into it.

  Kang’s first priority was Dr. Gilman, who seemed like he had a lot to gain by cooperating. Kang chose the week before Labor Day for the approach. Gilman looked like an easy target, a distinguished older gentleman who would never want to contemplate losing his job and spending what was left of his life in jail.

  Around 5 P.M. on August 31, 2011, Kang and a partner drove to Gilman’s house, which was located on a residential cul-de-sac in Ann Arbor not too far from the University of Michigan. They parked just down the street and knocked on the door. Gilman’s wife answered. After the agents identified themselves, she explained that her husband was at the hospital, doing his rounds. “He should be back later this evening,” she said. She looked extremely nervous. The agents waited for about an hour and then left.

  The next morning, the FBI agents came back and waited until Gilman left the house. They followed him on his drive to the hospital, pulling up alongside him as he parked his car. Kang hopped out and tapped on the window.

  “Dr. Gilman, can we speak with you?” he said.

  “Yes, of course,” Gilman replied. Kang suggested that they go inside and find a quiet place to talk.

  “We’re here to talk to you about insider trading,” Kang said once they sat down. “Did you disclose confidential information to Mathew Martoma?”

  Gilman was not the first person to become panic-stricken when confronted by armed federal agents and to start behaving irrationally. Although it had been three years since his last contact with Martoma and he had forgotten many of the details, Gilman knew that he had broken the law. He had spent the time since his last contact with Martoma, in fact, trying to forget the whole Elan thing had happened. He also knew that lying to the agents was likely to make matters worse. This was, of course, what the FBI wanted to happen: Once someone lied, the FBI had a hook in them for a perjury case.

  Gilman pushed reason aside and lied anyway.

  “I don’t know what you’re talking about,” he told Kang.

  “We have you on tape giving Martoma inside information,” Kang said, looking hard at Gilman. He let a few seconds pass, until the silence became uncomfortable. Kang was saying something that wasn’t true. There was no wiretap. But Kang’s philosophy was “Whatever it takes.”

  Gilman kept shaking his head.

  “We know you told Martoma about the bapineuzumab trial,” Kang said. “We have everything on tape.” There was no point in fighting, he insisted. You have too much to lose—your reputation, your professorship, your research grants.

  Gilman kept denying it and denying it until, finally, he said: “If you really believe that I shared confidential information and you have tapes of my calls, then it’s likely I did it, but I didn’t mean to.” He paused. “I don’t remember what I told him, exactly. It was three years ago.”

  Kang continued with his usual line of persuasion, telling Gilman it would be a shame to throw his career away by refusing to help them and help himself. Especially when he was an insignificant player in the entire scheme.

  Then Kang stared directly at him. “Dr. Gilman, you are only a grain of sand,” he said. “So is Martoma. The person we’re really after is Steven Cohen.”

  —

  Flying Pond is a magnificent tree-lined lake just north of Augusta, Maine, and Charles Riely retreated there for a vacation during the last week of August. As the SEC attorney prepared to go out for a long run through the woods, bending down to tie his shoes, he imagined, for the twentieth time that day, that he could hear the faint trill of his cellphone. Even though the biggest case of his career was about to move into a new, crucial phase, Riely didn’t dare suggest not going on the trip to his wife. He was distracted, though, and spent most of the week trying to find a cell signal so that he could check his voicemail for an update on the approach of Gilman. He was dying to know whether Gilman flipped. Finally, Riely got the call.

  “It went pretty well,” Kang told him, trying to put the most positive spin possible on the situation. They both knew from experience that people rarely start sharing everything they know at the first meeting, so Gilman’s refusal to answer questions wasn’t necessarily a rejection. There had been a bit of hope. Gilman had said he “might have” done it, Kang repeated. Getting someone to flip was like training for a long-distance run. Yo
u had to build up to it.

  Now that Gilman had been approached, the investigation was no longer a secret, and the SEC was free to start sending subpoenas for his personal and professional data. His calendars, his files from the University of Michigan, everything on his laptop. They were able to go back to Elan with more specific details about what they were looking for, including anything relating to Gilman’s role in the bapi trial. They could see from the phone records that Martoma and Gilman had often talked for over an hour at a time.

  “I don’t think I’ve ever had a conversation that lasted that long in my life,” Kang said to Riely at one point. “Can you imagine sitting on the phone for an hour and twenty minutes?”

  After the approach by Kang, Gilman had agreed, at least in principle, to cooperate. But it was far from clear that he was actually prepared to go ahead with it. Not remembering anything didn’t count as helping the government to the best of his ability.

  After dragging the discussion out for months, citing his client’s hectic conference schedule, Gilman’s lawyer finally agreed that he would come in to speak with the SEC and the prosecutors to see how he could help them. Even then, the lawyer made it clear, he wasn’t going to make things easy for the government. His client held the key to an enormous case, and everyone knew it. He had plenty of leverage to cut a good deal.

  Gilman had hired Marc Mukasey to represent him. Mukasey was a former prosecutor in the Southern District securities unit, and an SEC lawyer before that, who was now a partner at Bracewell and Giuliani. He was also the son of Michael Mukasey, who was a former federal judge who had served as attorney general under President George W. Bush, a fact that his son reminded people of at every opportunity. Mukasey quickly distinguished himself as someone who was going to be difficult. He employed the full arsenal of defensive tactics. He occasionally yelled. He cited Gilman’s age as an excuse. “My client wants to do the right thing, but he’s an old man who is sick and very busy,” Mukasey said when the prosecutors pushed to schedule a meeting. “I’ll check and get back to you.”

  As the SEC was still trying to pin down a meeting time with Gilman, Riely made a startling discovery while looking through a batch of phone records: Martoma had apparently placed a twenty-minute call to Cohen’s home phone on the morning of Sunday, July 20, 2008, at 9:45 A.M. It was an odd time for a work conversation. The following morning, Monday, trading records showed that SAC started liquidating its Elan and Wyeth shares, a nearly $1 billion investment. Martoma had to have told Cohen why they should reverse course and sell all their stock.

  “Holy crap,” Riely thought as he walked through the implications of this new discovery. Now it seemed like they might have a case against Steve Cohen, too.

  —

  After he was branded a “one-trick pony” and fired from his job at SAC, Mathew Martoma had moved with his wife and kids to Florida. Ostensibly, it was to be closer to their parents. But Florida also had generous tax shelter laws, allowing residents to shield their primary residences and other assets from bankruptcy and other kinds of judgments.

  The Martomas bought a five-bedroom, $1.9 million house at the Royal Palm Yacht and Country Club in Boca Raton. It was an ornate, Spanish-style mansion featuring an elevator, marble surfaces, and miles of heavy drapery. Out back was a swimming pool in the shape of a clover. Neither Martoma nor his wife was working, so they dedicated themselves to competitive parenting: Managing young Joshua, Ava, and David’s golf lessons, spelling bees, Mandarin tutoring, and private school education was a full-time occupation. They liked the idea of becoming philanthropists and placed $1 million into the Mathew and Rosemary Martoma Foundation, which gave them a generous tax deduction.

  On the evening of November 8, 2011, Martoma and his wife came home to find B. J. Kang and his partner, Matthew Callahan, waiting in front of their house.

  “I’m Special Agent Kang, from the FBI,” Kang said. He introduced Callahan. Then he said: “Your former business partner, Stephen Chan, is about to get out of jail.” Recognition flickered across Martoma’s face. “I’d like to talk to you about it.”

  Kang had thought carefully about his first line. He wanted Martoma to know that he had done his research. By this point, he knew everything about Martoma and his life, things his wife probably wasn’t even aware of. The opening line was about communicating the seriousness of the situation, that they weren’t just there to see what they could find out and then go home.

  Rosemary’s eyes were wide as the moon. She remembered that their children were in the house, probably wondering what was going on. She said she would be right back and went inside to check on them.

  As soon as she was gone, Kang turned back to Martoma.

  “Listen,” he said. “We aren’t here because we want to talk about Chan. We are here to talk about insider trading while you were at SAC.” He paused and watched the color drain from Martoma’s face. “We want to talk about Elan and July 2008.”

  Right there in his own driveway, Martoma fainted.

  CHAPTER 11

  UNDEFEATABLE

  Like many people who immigrate to America from faraway places, Mathew Martoma’s parents dreamed of what their children might eventually achieve there. They had especially high expectations for their firstborn son, whom they named Ajai Mathew Mariamdani Thomas. Martoma’s mother, Lizzie Thomas, was a twenty-six-year-old medical resident in Michigan when he was born, in 1974. Both she and Martoma’s father, Bobby Martoma, were Christians from Kerala, located in India’s tropical south. Bobby emigrated in 1964 at age nineteen to study mechanical engineering in the United States; after graduating from Howard University, he took a job as an engineer with the Ford Motor Company in Michigan. When Martoma was a toddler, the family moved to Florida.

  Bobby fantasized that a child of his might one day attend Harvard. The family was active in their church in Coral Springs, and Bobby prayed for Harvard every day. His son’s grades in school were a subject of intense interest. Martoma was enrolled in gifted classes at the Christian elementary school he attended and went on to graduate as the co-valedictorian of his class at Merritt Island High School, in Rockledge, Florida. Still, Mathew’s performance wasn’t enough to get him into Harvard, and his father was furious at his son. His anger drove him to a stunning act of paternal cruelty. A few weeks after Mathew’s eighteenth birthday, he presented his son with a plaque that said: “Son Who Shattered His Father’s Dream.”

  Martoma ended up going to Duke, where he majored in biology and spent his free time engaged in résumé-bolstering extracurricular activities. He volunteered with Alzheimer’s patients and lived in a community-service-oriented dormitory. He went by his given name, Ajai Mathew Thomas, although people called him “Mat.”

  At every step of his academic career, Martoma proved skilled at cultivating mentors, particularly male ones, who served as surrogate father figures. One of his professors, Bruce Payne, who taught a course on ethics and policy-making, recalled Martoma as eager and hardworking, someone who stood out because he dressed more formally than the other students, as if he might at any moment be called up for a job interview. “What was interesting about Mat was that he was actually more interested in the field of ethics than most of my students,” Payne recalled. “Mat got a handle on the class pretty quickly, and understood how to do the kind of analysis that I was looking for and hoping for.” Early in the semester, Martoma campaigned to be made head teaching assistant for the class, and Payne agreed.

  Martoma spent the year after graduation at the National Institutes of Health, in Bethesda, Maryland, working on the National Genome Project. “He was ambitious, he wanted to make something of his life,” said Ronald Green, a Dartmouth professor who supervised Martoma during his year at NIH. “To some extent, I felt like Mathew was an adopted son.”

  While he was at NIH, Martoma applied to law school. When a thick envelope arrived from Harvard Law School bearing the news that he had been accepted, Martoma’s father was ecstatic. In the fall of 1997,
Bobby drove Mathew from Florida to Massachusetts in a U-Haul to get him moved in. In many ways, Martoma was a typical Harvard Law student—which is to say, someone who did very little in the way of relaxation, and spent his time almost exclusively on activities that would enhance his curriculum vitae. He tried to make the most of his time there, co-founding a campus group called the Society of Law and Ethics and serving as an editor of an on-campus law journal.

  During his second year, though, Martoma began struggling with his coursework. This was due in part to his heavy load of extracurricular activities, something his father had warned him about. His grades started to go down. In the late fall, his classmates began applying for prestigious summer clerkships, a common rite for the most ambitious students, but Martoma’s grades weren’t quite what he’d hoped. The students with straight As, he knew, would take all the coveted slots.

  He was determined to get a clerkship anyway, which led him to a fateful decision. Martoma’s academic performance wasn’t good enough—so he would make it good enough. He spent an afternoon in December meticulously altering the grades on his transcript in his Civil Procedure, Contracts, and Criminal Law classes, changing them to As from the B, B+, and B he’d actually received. Then he sent applications off to twenty-three judges.

  That January he was invited to interview with three judges on the Washington, D.C., Circuit Court of Appeals. Second only to the Supreme Court in stature, it plays a crucial role in shaping legislation and rulings on the reach of the federal government. The judges had already received his transcript and had been impressed. In person, they were struck by Martoma’s handsome appearance, his deference, and, of course, his dazzling academic record. Two of the three rated him as an “excellent” candidate. One of the judges called Martoma on the night of February 2, 1999, to offer him a clerkship. It was late, and a bleary-sounding Martoma answered the phone. He seemed so disoriented that the judge suggested that Martoma call him back the following day. When Martoma failed to return the call, the judge’s clerk tried to reach him and left a message asking that Martoma call the judge back. The clerk tried again, on February 4, and left another message.