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Martoma: What Makes An MBA Go Wrong?

Mathew Martoma apparently lied his way into Stanford's MBA program

Mathew Martoma apparently lied his way into Stanford’s MBA program

What Makes an MBA Go Wrong?

You’ve probably heard the name of Matthew Martoma. You might remember him as the portfolio manager who was convicted of insider trader over an alzheimer’s drug.

You may also remember Stanford rescinding his MBA (a humiliation that Wharton’s Michael Milken avoided for the same crime). The irony? Martoma studied bioethics as an undergrad at Duke University.

“What to make of the early interest in ethics,” mused Bruce Payne, one of Martoma’s Duke professors. “A hugely ambitious guy wanting to know the exact contours of the boundaries that might limit him? Or an anchor to the windward for self-protection by someone already willing to break the rules to his own advantage? If it was the latter, I was conned, and conned quite effectively.”

Alas, the Martoma saga continues, as the U.S. Court of Appeals postponed his nine-year sentence on Tuesday (November 4) so he could appeal his conviction.

And that’s another irony to the Martoma story: Despite a checkered past and overwhelming evidence against him, Martoma still refuses to concede that he did anything wrong.

And “wrong” is the key word. After Martoma’s story arose – He was once expelled from Harvard Law for forging his transcript – business schools engaged in deep reflection. “How did a liar and a cheat make it through our screening process,” they mused in conference rooms across the country. Even more to the point: “How many alumni are out there who did something similar?”

In reality, they should ask a more profound question: “What makes a man go bad?” Is it the pressure to please one’s parents, one of Martoma’s great burdens? Do people take shortcuts for the money? The prestige? To hold onto what you have? Or, do those small compromises add up to the point where you can rationalize anything?

Those were some of the themes behind a new and highly compelling piece in The New Yorker that chronicled Martoma’s fall from grace. Here’s the story: Dr. Sid Gilman, who oversaw safety monitoring for a promising experimental drug called Bapineuzumab (Bapi), developed a friendship with Martoma. At that time, Martoma’s employer, S.A.C. Capital Advisors, held a $700 million dollar position in Elan and Wyeth, two pharmaceutical companies that were collaborating on Bapi’s development. After Martoma allegedly learned from Gilman about the drug’s mixed results during trials, S.A.C. quietly dumped its shares of Elan and Wyeth stock, earning a tidy $275 million dollar profit (with Martoma notching a hefty $9.3 million dollar bonus).

As expected, the trades caught the attention of Stock Exchange regulators and the Securities and Exchange Commission, which had already conducted several investigations into Martoma’s boss, S.A.C. head Steven A. Cohen. Over 15 years, Cohen had raised some eyebrows by charging steep surcharges and generating a 30% annual return, leading regulators to believe he was using confidential information or “edge” (a synonym for “insider training”) to gain an advantage.

S.A.C had developed a culture of deniability. According to The New Yorker, the legal department had warned staffers not to “compose or send any electronic communication, or leave any voice mail message, if you wouldn’t want it . . . read by regulators.” Often, Martoma’s emails to Cohen consisted of one cryptic line: “Do you have a sec to talk?”

Although the Justice Department intended to use Martoma to gain leverage on Cohen, Martoma steadfastly maintained his innocence. In the end, everyone lost. Martoma was arrested, taking the perp walk in front of his wife and children. His misdeeds were exposed and his millions were squandered in the legal fight. Dr. Gilman – who viewed Martoma as the son he lost to suicide – lost his $320K job teaching at the University of Michigan. He became a disgrace, where school administrators “scrubbed all traces of him from the institution: the wing of the hospital, the lecture series, the university’s Web site. His federal grant support disappeared, his former colleagues wanted nothing to do with him, and he was banned from the campus.”

Even Cohen, the Teflon kingpin who some believe masterminded Martoma’s transgressions, paid a price – literally. His firm paid out $616 million dollars to settle suits related to insider trading allegations for Martoma and others.  S.A.C. was dissolved, re-emerging as Point72 Asset Management, a firm “limited to investing Cohen’s personal fortune of roughly nine billion dollars.” Despite his coyness and denials, Cohen is being separately prosecuted for a lack of institutional control. Even the shareholders of Elan and Wyeth have entered the picture, launching a class-action lawsuit that includes allegations of racketeering.

In the end, this was one man’s journey from promise to incarceration. You could say that Martoma is another Jordan Belfort, a cagey wolf whose appetites and demons undermined him. Whereas Belfort lost his family, Martoma’s wife and parents stand steadfastly behind him, enabling his every excuse. What’s more, while Belfort grudgingly learned (a little) from his excesses, Martoma remains in denial.

Another thing stands out: Despite Cohen firing him in 2010 – just two years after his big score shorting Elan and Wyeth stock, Martoma refuses to point the finger at Cohen. To skeptics, this silence may stem from an under-the-table deal. But The New Yorker offers a more tantalizing possibility: It would mean admitting guilt.

“Within this close-knit family, it seemed crucial to maintain that Martoma was going to prison for a crime that he did not commit, and it occurred to me that there might be one final explanation for his unwillingness to accuse Cohen of criminality. In order to implicate Cohen in a conspiracy, Martoma would have had to plead guilty and admit to being part of that conspiracy himself. Could it be that Martoma was prepared to leave his wife and family and spend the better part of a decade in prison for the sake of preserving their illusion that he was an honorable man? I thought of Gilman on the stand, abandoned by his friends and colleagues, while the first few pews in the courtroom were filled by Martoma’s extended family—by people who believed in him.”

Maybe that’s why Judge Paul Gardephe’s rebuke at Martoma’s sentencing was so profound. Gardephe noted that there was a “common thread” between Martoma’s doctoring of his grades and his wrongdoing at S.A.C, where he showed an unwillingness to accept anything other than the top grade, the best school, the highest bonus—and the willingness to do anything to achieve that result.”

And maybe that’s the true nature of “wrong.” Sure, it is knowingly crossing lines, believing rules don’t apply and consequences are small. But it can also stem from a blindness to the patterns that ultimately determine our future conduct.


Source: The New Yorker