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Money, ego, and meds: Why would UM doc sell out to hedge fund?

University of Michigan Health Systems

You're an 80-year-old famed neurologist at the University of Michigan. You're a giant in your field, with a list of honors and awards as long as your arm. You're such a big name in Alzheimer's research that major drug companies ask you to run their clinical trials.

And then you blow it all by giving secret information to a hedge fund investor in what the FBI and the SEC are calling most lucrative insider trading scheme ever. 

But, why?

The Money

The money was good, but not astronomical. According to the SEC, Gilman made about $100,000 consulting for the firm that introduced him to Mathew Martoma, the hedge fund investor. 

A hundred grand is nothing to sneeze at. But put that up against what Martoma made: $9 million in bonuses that year, most of which appears to be for getting the secret results of the Alzheimer's drug test from Gilman.

It's hard to wrap your mind around how valuable that information was. Gilman told  Martoma that the drug in testing, called "bapi" (short for bapineuzumab) was failing to prevent mental decline in Alzheimer's patients.

The news would be a major hit for the industry and investors, but by knowing about the negative test results before anyone else, Martoma's company could yank their $700 million investment out of two drug companies before the stocks crashed. 

So instead of bleeding money, Martoma's company made $276 million in illicit gains, according to the SEC. Not bad for information that cost you less than $100 grand to a University of Michigan doctor.  

And Gilman will have to pay all his gains back and more, obviously. He's already agreed to pay the SEC $234,000. The ripple effects are still playing out, with the University of Michigan Health Systems scrambling to assemble a response for the press, and their neurology department going into lockdown mode and letting the phones ring.

What's more, this scandal will likely devastate Gilman's reputation in the field he once led. It will also probably mean an end to lucrative consulting contracts with drug companies like Elan, which paid Gilman $79,000 to work with them on bapi.  

The Relationship: Expert Network Firms Have a Sketchy Past 

So if Gilman wasn't raking in Wall Street bonus-sized dough, why did he risk his career and violate legal and ethical boundaries by blowing his confidentiality agreements?

According to the SEC's press release, "Dr. Gilman developed a personal relationship with Martoma, eventually coming to view Martoma as a friend and pupil."

The two were introduced through an expert newtork firm, which essentially sets investors up with knowledgable specialists. In this case, Gilman was getting paid $1,000 an hour to offer his perspective and expertise about Alzheimer's  and neurology research, which Martoma hoped would then help his company make more informed investments.

If this sounds like it could easily lead to gray areas between sharing "expertise" and sharing illegal information, you're probably right. American regulators are cracking down on the expert networks. According to The Economist, "more than a dozen people with links to expert networks have been arrested for insider trading."  

For example, does the name Raj Rararatnam ring a bell? When the manager of the Galleon Group hedge fund went down for insider trading,  10 of those arrested in connection with the scandal "had connections to an expert network firm, whether as consultant, employee, or client," according to the Boston Globe.

So how do these networks work, exactly? The premise is certainly above board. Private investors fund a lot of medical research. But much of that research is in medical jargon that finance folks can't understand. It makes sense to pay a doctor or researcher to talk them through new findings, give them background information, and help them understand what results mean.

"The biggest funder of medical research is private industry," Dr. Stephen Rennard told the Boston Globe. He's a University of Nebraska pulmonologist who's worked for expert network firms. "It's important to keep investors engaged in the process - and engaged in the process in an informed way. And this is one of the few ways I can have some influence [on them]." 

How It Went Down

But the grey areas start to disapear when you read through the complaints about Gilman and Martoma. Going by the Department of Justice's case, it appears that Gilman "knowingly and repeatedly" gave up secret information he had access to because of his role overseeing the drug trials. 

And it also appears that Gilman and Martoma knew their discussions needed to be kept a secret. According to the SEC complaint, when Gilman found out that he had been selected to prsent the Phase II trial results of the drug, Gilman sent an email to Martoma: "please set up [an expert network firm] conversation re MS." The complaint goes on:

"During this consultation - purportedly about MS - Gilman informed Martoma that he would be the presenter of the final clinical trails." 

The drug company Elan then flew Gilman out on a private jet to prepare him for the presentation. That's when they told him that their trials were getting negative results - patients weren't getting better under the treatment.

This was huge. Corporate investments in Alzheimer's drugs were going to dry up. Companies would take this negative trial as a sign that Alzheimer's couldn't be treated, at least not any time soon.

Obviously, the inside jump on this info was worth hundreds of millions of dollars. And that's just what Gilman gave Martoma, according to the SEC's complaint:

"On July 17, 2008, after Gilman returned to Ann Arbor, an Elan officer sent Gilman an updated PowerPoint presentation in an email labeled 'Confidential, Do Not Distribute.' The 24-page PowerPoint included summaries of the...results." 

The FBI says Gilman turned right around and gave Martoma the PowerPoint, as well as the password he'd need to access it. This was well before the information was going to be presented to the public and investors. And it enabled Martoma's company to make their millions. 

Michigan Radio has obtained audio from the press conference charging Martoma with insider trading, which we'll post soon. It includes more details about the information shared between Gilman and Martoma from the FBI.

Gilman isn't facing charges at this time, as he's working as a cooperating witness with the Department of Justice. Martoma is facing three counts of securities fraud. 

Kate Wells is a Peabody Award-winning journalist currently covering public health. She was a 2023 Pulitzer Prize finalist for her abortion coverage.