U.S. District Judge Paul Gardephe in Manhattan said Martoma's alleged trades in American depository receipts of Irish drugmaker Elan Corp (>> Elan Corporation, plc) qualified as domestic transactions covered by U.S. securities laws.
As a result, the judge rejected Martoma's request to dismiss one of two securities fraud charges, as well as related allegations in a conspiracy count. The defendant has pleaded not guilty to the three counts, and faces a January 6 trial.
Martoma's lawyer Richard Strassberg, a partner at Goodwin Procter, declined to comment.
SAC, the Stamford, Connecticut-based hedge fund run by billionaire Steven A. Cohen, pleaded guilty on November 8 to fraud and agreed to pay $1.8 billion, including prior regulatory settlements, to end a federal insider trading probe. Cohen has not been charged with a crime.
Prosecutors accused Martoma of helping SAC affiliate CR Intrinsic Investors avoid $276 million of losses in 2008 by recommending that it sell shares of Elan and Wyeth, based on a doctor's tips about poor trial results for a diabetes drug. Wyeth is now owned by Pfizer Inc (>> Pfizer Inc.).
Martoma argued that a key U.S. insider trading law, Section 10(b) of the Securities Exchange Act of 1934, did not cover the Elan trades because a 2010 U.S. Supreme Court decision limited the reach of that law to domestic transactions.
The 2nd U.S. Circuit Court of Appeals, which hears appeals from Manhattan, in August extended that decision, Morrison v. National Australia Bank Ltd, in finding that U.S. criminal securities fraud laws don't extend outside the country.
But Gardephe said the Elan ADRs were listed and traded on the New York Stock Exchange, "an official American securities exchange," and that Martoma cited no case to show that Section 10(b) should not apply.
The judge also rejected Martoma's argument that because Elan's ADRs were mere "receipts," the trades qualified as foreign because "liability was incurred and title passed" when Elan deposited the associated shares with the Bank of Ireland.
"Defendant's arguments are not persuasive," Gardephe said. "Here, it is undisputed that the Elan ADRs at issue were traded on the NYSE, which means that the formation of contracts for those trades, the passing of title to those securities, and the incurring of liability on the part of sellers and purchasers of those ADRs occurred in the United States."
U.S. prosecutors have charged eight SAC employees with insider trading. Six have pleaded guilty, while Martoma and portfolio manager Michael Steinberg pleaded not guilty. Jurors began deliberating in Steinberg's trial on Tuesday.
The case is U.S. v. Martoma, U.S. District Court, Southern District of New York, No. 12-cr-00973.
(Reporting by Jonathan Stempel; Editing by Alden Bentley, Andrew Hay and Vicki Allen)
By Jonathan Stempel