Mathew Martoma, 40, a former trader at SAC Capital Advisors, will spend a good chunk of the prime of his life behnd bars. He was sentenced today to nine years in prison and ordered to forfeit $9.38 million in misbegotten gains for insider trading.

Mathew Martoma SAC

Ex SAC Trader’s sentence reflects increased punishment for insider trading

Martoma’s prison sentence, handed down by U.S. District Judge Paul Gardephe, falls behind the two record sentences recently handed down, but nonetheless reflects a growing trend for increased sentences for insider trading. In 2011 hedge fund trader Raj Rajaratnam was slapped with an 11-year insider trading sentence, only to be topped the following year when former lawyer Matthew Kluger was handed a 12-year sentence.

Prosecutors had argued that Martoma deserves a sentence of more than eight years in prision, and the judge agreed.

Martoma, 40, was convicted by a jury last February of in insider trading in a scheme that allowed SAC to make profits and avoid losses of $275 million.  The profits generated on insider information regarding two pharmaceutical companies makes this case one of the most profitable insider trading cases in history. Sentencing guidelines rely heavily on the size of profits in a case to determine the punishment.  If so, don’t be surprised to see a stiff penalty in an insider trading case in history. Some estimates have suggested a potential sentence of 235 months, although today’s sentence is much lighter.

Size of profit or loss caused by fraud

The profit or loss caused by a fraud plays a prominent role in sentencing recommendations, a Wall Street Journal report noted. Because of the size of the profits,. Martoma could have faced as many as 20 years in prison under recommendations from the Manhattan federal court’s probation office.  As previously reported in ValueWalk, a 20-year sentence was considered “outrageous” by Martoma’s legal team.

Martoma’s conviction marks the eighth former SAC employee to be convicted of insider trading, with most pleaded guilty rather than opting for a trial. SAC, which changed its name to Point72 Asset Management and no longer manages outside money in the wake of the insider trading scandal, pleaded guilty this past November to criminal insider-trading charges, agreeing to pay nearly $1.2 billion in penalties. As part of the settlement, the firm said it would stop managing outside money.

There has been a significant uptick in insider trader penalties that is due in part to robust enforcement of insider trading by U.S. Attorney Preet Bharara, who covers the southern district in New York which includes the Wall Street area.  Since October of 2009 Bharara’s office has charged 89 people with insider trading, netting 81 convictions.  While enforcement of insider trading against hedge fund executives remains robust, there have yet to be any criminal charges against big bank executives who created and sold defective derivatives that led to the 2008 market meltdown.