Here’s Why Former SAC Trader Martoma Was Booted From Harvard

More than a decade before he was charged in what federal prosecutors call the most lucrative insider trading case in U.S. history, Mathew Martoma was expelled from Harvard Law School for fabricating his academic transcript and then trying to cover his tracks by concocting “evidence” from a phony computer forensics firm. The startling revelations — which are not disputed by Martoma’s defense team — were contained in two court documents unsealed Thursday by U.S. District Judge Paul Gardephe, who is presiding over the case.

Martoma is accused of trading illegally on inside information he obtained from a doctor involved in a 2008 pharmaceutical trial for an Alzheimer’s drug called bapineuzumab that was being jointly developed by Elan Corp. and Wyeth. The trades allowed SAC Capital to make financial gains and avoid losses of $276 million. Manhattan U.S. Attorney Preet Bharara has said the scale of Martoma’s insider trading scheme “has no historical precedent.” Martoma has pleaded not guilty. His trial started this week in the Southern District of New York.

Lawyers for Martoma, a former portfolio manager at Steven A. Cohen’s hedge fund SAC Capital, had sought to keep the documents under seal, arguing that they are irrelevant to the case. But prosecutors said they wanted to be able to introduce the Harvard incident in the likely event that the defense highlights the lack of forensic evidence — like smoking-gun emails — in the SAC insider trading case. The Harvard episode, prosecutors believe, demonstrates that Martoma understood the “importance of minimizing electronic evidence that could establish his guilt and his capacity to alter such evidence to fit his version of events.”

(MORE: Inside the Biggest Insider Trading Case in American History)

According to the newly unsealed documents, in December 1998, Martoma used computer software to change several grades on his Harvard Law School transcript from B to A, as part of his clerkship applications to 23 federal judges. Harvard soon discovered the doctored transcripts and confronted Martoma, who first claimed “it was all a joke,” then changed his story and said he had actually been trying to impress his parents.

Martoma asserted that the altered transcript had been sent to the judges due to an error made by his brother, who had assembled his clerkship application materials. Martoma then claimed that after he discovered the error, he had sent withdrawal letters to the judges before being confronted by Harvard officials. That was also a lie. In truth, Martoma had sent the withdrawal letters only after being confronted, and had tried to cover up that fact by pre-dating emails that he submitted in his defense.

Harvard officials weren’t buying it. On May 12, 1999, the university’s administrative board recommended that Martoma be expelled. Even then, Martoma continued his deceptions. In response to the expulsion recommendation, Martoma and a friend created a phony computer forensics company, which provided “evidence” to Harvard disciplinary officials filled with “impressive sounding techno-jargon” in an attempt to explain away the discrepancies in Martoma’s earlier emails. None of these facts are disputed by Martoma’s lawyers.

After his expulsion from Harvard, Martoma changed his name, which previously had been Ajai Mathew Mariamdani Thomas, to Matthew Martoma. He applied to, and was accepted by, Stanford Business School, where he earned an MBA. He would later join SAC Capital. Martoma’s lawyers argued that the Harvard episode was irrelevant to the insider trading case. “This event of 15 years ago is entirely unrelated to — and has no bearing on — this case,” a spokesman for Martoma said in a statement cited by Bloomberg. “Raising it now is a transparent effort by the government to unduly influence the ongoing court proceedings.”

(MORE: Why Fainting Can’t Be Used in SAC Trader’s Trial)

Prosecutors argued that Martoma’s experience manipulating forensic evidence should be relevant, particularly with respect to a non-public Power Point document he received from a doctor about the Alzheimer’s drug that is at the heart of the insider trading trial. “Martoma’s demonstrated capacity to create elaborate electronic forgeries — which included expertise with respect to altering the dates of electronic records — could have been employed by Martoma to generate phony evidence purporting to show that Martoma had received the document only once it had become public,” prosecutors argued in a motion to unseal the Harvard evidence.

More than a decade later, the FBI would show up at Martoma’s multimillion-dollar Florida mansion shortly before dawn on a November morning in 2011. Federal agents had arrived to inform Martoma that U.S. prosecutors had evidence that he had violated federal securities laws. As the agents outlined the severity of the situation, the former SAC Capital trader fainted on his front lawn. Martoma has been charged with one count of conspiracy to commit securities fraud and two counts of securities fraud. Each fraud count carries up to 20 years in prison. Opening statements in the trial are scheduled to begin on Friday.

Martoma’s prosecution is part of a multi-year federal investigation into SAC Capital. Last year, SAC was charged with securities and wire fraud for a decade-long scheme in which the fund engaged in a pattern of “systematic insider trading” that allowed it to reap hundreds of millions of dollars in illegal profits. Last November, SAC agreed to settle the case by paying $1.8 billion and pleading guilty to fraud charges. Cohen has not been charged criminally, but faces civil charges for failing to supervise Martoma and another former SAC trader, Michael Steinberg, who last month was convicted of insider trading charges.