Martoma: Prior Bad Acts and Hobson's Choice for Defendants

, New York Law Journal


Robert J. Anello and Richard F. Albert
Robert J. Anello and Richard F. Albert

A criminal defendant's decision to take the stand or remain silent in the face of the government's accusations is one of the most pivotal choices to be made during a criminal trial. Frequently, defendants opt to stay silent, fearing the prosecution's inevitable attack on their credibility and character if they take the stand to defend themselves. Many believe, however, that declining to take the stand in white-collar cases is risky, particularly in insider trading prosecutions—just ask Michael Steinberg, Raj Rajaratnam, or Rajat Gupta, a few of those convicted in recent high-profile insider trading cases after deciding not to testify at trial.

The popular perception is that the jury wants to hear the defendant's story from the horse's mouth and a defendant's decision to stay silent can give the impression that he or she has something to hide. In some instances, however, the "something to hide" may be unrelated to the case at hand. It may be a 14-year-old law school expulsion for altering an academic transcript, for example, or evidence that the date on an email was changed in an attempt to cover-up the aforementioned transcript alteration.

How such past conduct relates to present day allegations of criminal wrongdoing is hard to fathom unless the defendant takes the stand to declare his honesty and veracity. Nevertheless, an insider trading prosecution currently on trial in the Southern District of New York reveals how the government can seek to inject such "prior bad acts" evidence into a case to raise questions about the defendant's credibility regardless of whether or not the defendant takes the stand. At the very least, the government's aggressive stance is likely to dissuade the defendant from testifying in his own defense.

Mathew Martoma Trial

Experience shows that winning an acquittal in a criminal insider trading case is not easy. In recent trials in the Southern District of New York, the government is batting a thousand. The insider trading investigation of SAC Capital hedge fund and former SAC employees, referred to as the "most lucrative insider trading case in United States history," demonstrates that defendants charged with insider trading believe they have little chance of success. In November 2013, SAC Capital agreed to pay $1.2 billion and plead guilty to fraud charges related to the probe into insider trading at the corporation. In December 2013, a top portfolio manager at the company, Michael Steinberg, was found guilty of five counts of conspiracy and insider trading. Six other employees have pleaded guilty.1

Former SAC portfolio manager Mathew Martoma is the second employee, after Steinberg, to contest the government's insider trading charges. Martoma is charged with illegally trading on confidential information obtained from a doctor involved in a 2008 pharmaceutical trial for an Alzheimer's-related drug jointly developed by Elan Corp. Plc and Wyeth.

The indictment alleges that Martoma received inside information about the drug companies' Alzheimer's study from Dr. Sidney Gilman, an Alzheimer's disease expert and professor who worked as a paid consultant to Elan. Among the information Martoma is alleged to have received is an advance copy of a PowerPoint presentation created by Elan for Gilman to use in publicly presenting the final results of the confidential drug trial at an Alzheimer's disease conference in July 2008. The presentation revealed that the drug had not been as successful as hoped. According to the government, within one half-hour of Gilman's receipt of the presentation, he contacted Martoma to discuss the negative outcome of the drug trial and also "sent Martoma the confidential presentation slides he had received from Elan" via email.2 Allegedly, Martoma subsequently caused SAC to sell virtually all of its approximately $700 million worth of Elan and Wyeth stock.

Following the public announcement, Elan stock fell approximately 42 percent and Wyeth stock fell approximately 12 percent.3 The government has charged that the trades prompted by Martoma's inside information allowed SAC Capital to make financial gains and avoid losses of $276 million and that Martoma received a bonus of approximately $9.3 million.4 Preet Bharara, the U.S. Attorney for the Southern District of New York, has been quoted as saying that the scale of Martoma's insider trading scheme "has no historical precedent."5

At issue in the case is whether Gilman in fact emailed the PowerPoint presentation to Martoma. The government concedes that although Gilman—who is cooperating with the government and received a non-prosecution agreement for his role in the scheme—will testify that he sent the PowerPoint presentation to Martoma via email, no computer forensic evidence supports this claim. To the extent Martoma seeks to raise the lack of forensic evidence in his defense, the government insists it should be able to use evidence of prior bad acts by Martoma in rebuttal to show that the defendant possesses the ability to destroy or fabricate electronic forensic evidence and, therefore, had the ability to destroy evidence of his receipt of the PowerPoint presentation.6

According to documents unsealed earlier this month by Southern District of New York Judge Paul G. Gardephe, the prior bad acts evidence relates to Martoma's expulsion from Harvard Law School in 1999 for fabricating his academic transcript. Specifically, the government seeks permission to admit evidence claimed to show that Martoma, who changed his name from Ajai Mathew Thomas after the expulsion: 1) used computer software to generate a forged law school transcript, which subsequently was submitted to federal judges from whom the defendant sought a clerkship; 2) fabricated phony email evidence to bolster a false defense before the law school Administrative Board; and 3) submitted on appeal a phony report from a computer forensics firm (established by Martoma himself) purporting to bolster Martoma's claims. The government argues that this evidence would be admissible under Federal Rule of Evidence 404(b) as evidence of the defendant's capacity to destroy or fabricate electronic forensic evidence.

Martoma argues that the government impermissibly seeks to "fill the gaping hole in its case by turning the [Harvard Law School] material into a Sword of Damocles that precludes Mr. Martoma from offering straightforward defenses to the charges against him."7 Martoma insists that the evidence is inadmissible. First, as a factual matter, Martoma points out that the Harvard Law School proceedings were hotly contested and that the "findings and conclusions" were not as clear cut as the government represents. He argues that submission of the evidence at trial likely would lead to lengthy and complex "mini-trials" on issues tangential to the case.

Second, Martoma argues that the evidence is irrelevant and unfairly prejudicial. "The [evidence] is not probative of any special capacity, ability, knowledge, or modus operandi…, [but] consists of disputed allegations against Martoma."8 Further, Martoma asserts that whether he engaged in any of the alleged Harvard Law School conduct makes it no more likely that he engaged in the insider trading conduct at issue. Instead, the evidence would only reflect negatively on Martoma's character – exactly the type of evidence Rule 404(b) is intended to preclude.

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