Indicted S.A.C. Capital Exec Battling Privilege

MANHATTAN (CN) - A doctor cooperating in the inside-trading case against a former S.A.C. Capital can intervene in that executive's attempt to subvert attorney-client privilege.

Mathew Martoma is accused trading Wyeth and Elan Pharmaceuticals after Dr. Sidney Gilman allegedly informed him about the test results of an Alzherimer's drug Elan was developing.

Gilman is a cooperating witness in the federal government's case, and attorneys for Martoma moved to compel the government and/or the University of Michigan, where Gilman used to work, to produce certain documents.

The government opposed the motion, arguing that the materials qualified for attorney-client privilege.

U.S. District Judge Paul Gardephe found Friday that the government lacks standing to oppose the motion, but that Gilman can intervene.

Gardephe did not yet address the doctor's motion for a protective order barring the production of the allegedly privileged materials, adding that he would address that issue in a forthcoming order.

Court documents show that the University of Michigan gave Gilman a laptop, a desktop computer, iPhone, iPad and five external flash drives.

In August 2012, Gilman allowed the FBI to make a forensic image of the laptop's hard drive. Before it was copied, Gilman's counsel and the government acknowledged that it contained potentially "confidential information."

After Martoma was indicted and requested the government produce a copy of the imaged hard drive, Gilman's counsel informed the government that the documents appeared to be privileged.

Gilman resigned from the university last November, and the university requested he return all electronic devices issued. Gilman did, but asserted that "neither [he] nor any other privilege holder waives any applicable privilege(s)."

The government gave the imaged hard drive to the university for decryption to satisfy its discovery.

University of Michigan has agreed not to produce any potentially privileged documents until the court resolved the issue.

Gardephe rejected the government's argument that it has standing on the discovery issue because it has a responsibility not to give Martoma documents over which a witness has made a nonfrivolous claim of privilege.

"While the government may have an ethical obligation to bring the privilege issue to the court's attention, that obligation does not confer standing on the government to assert privilege on Dr. Gilman's behalf under the circumstances of this case," he wrote.

The government cannot challenge the inadequate protection of someone else's privilege, according to the ruling.

"The government is not authorized to assert Dr. Gilman's privilege merely because he has expressed a desire to preserve the confidentiality of the communications at issue," Gardephe wrote. "Given that Dr. Gilman has moved to intervene to assert his rights, and has not authorized the government to assert those rights on his behalf, the government does not have standing to assert Dr. Gilman's privilege here."

In a superseding indictment , federal prosecutors announced they are seeking from Martoma $13.7 million in cash, plus his Boca Raton, Fla., home.

The government also alleged that Martoma got confidential information about a drug trial conducted by Wyeth and Elan Pharmaceuticals from a second doctor.

The government wants Martoma's mansion, plus $9.3 million in pay he received while working for S.A.C., the hedge fund run by Steven Cohen.

The government also reportedly wants $245,000 from an account held at ING, $3.2 million held at American Express and $930,000 held at a Vanguard account.

S.A.C. was indicted on fraud charges in connection with the allegations of insider trading by Martoma and seven others. Cohen was not criminally charged, but the Securities and Exchange Commission has filed civil charges against him. Cohen has denied any wrongdoing.

Martoma has pleaded not guilty that he traded shares of Martoma's trial is set for November.

In July, the SEC charged S.A.C., one of the nation's largest hedge funds, with wire fraud and four counts of securities fraud. In July, the SEC charged S.A.C., one of the nation's largest hedge funds, with wire fraud and four counts of securities fraud.

Michael Steinberg, 40, of New York City, was criminally charged in March this year with securities fraud and conspiracy. He was a portfolio manager at S.A.C's wholly owned subsidiary, Sigma Capital Management.

John Horvath, 43, of San Francisco, pleaded guilty last September to securities fraud and conspiracy. He worked at Sigma and reported to Steinberg.

The indictment stopped short of charging Cohen with criminal wrongdoing, but did accuse Cohen of failing to supervise his portfolio managers. The SEC also asserted that Cohen's hedge funds earned profits and avoided losses totaling more than $275 million.

The hedge fund paid a record $616 million to settle two inside trading lawsuits filed by the SEC.

Cohen also has been sued by his ex-wife, Patricia, who claims he made a lot of money from inside trading and hid millions from her during their divorce.

Elan also faces two shareholder actions.

Authorities have described the scheme as most profitable insider trading conspiracy ever uncovered.

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