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[Billy Ray Valentine]

THE money making strategies of hedge funds come in a variety of guises, most of them baffling to outsiders. None is as mystifying as “tape reading”, whose practitioners use the movement of market prices to gauge where a particular stock is heading, even while knowing nothing of the underlying company. An undoubted master of the art, Steven Cohen, has become a figurehead of the hedge-fund industry, using his savvy with stocks to propel his fund, SAC Capital, to be one of the world’s most successful. American authorities increasingly believe they have a more prosaic explanation for SAC’s success: this week they accused a former SAC trader of conducting what may be the biggest-ever insider-trading job, illicitly netting $276m.

Simple bribery is at the core of the case. The Securities and Exchange Commission (SEC) says that between 2006 and 2008 Mathew Martoma, a trader working for an SAC subsidiary, paid $108,000 to a doctor overseeing medical trials for a promising drug used in the treatment of Alzheimer’s. The insider’s tip about adverse side-effects helped SAC avoid losses by selling its shares in the two pharmaceutical companies backing the drug, and then profit by betting their shares would tumble. The US Attorney’s office in New York is issuing criminal charges.

Mr Martoma’s arrest is part of a wider, five-year snare on insider traders. From a trickle, 69 people have been convicted in the past two years, most prominently Raj Rajaratnam, the boss of Galleon Group, once a $6.5 billion hedge fund, who was jailed for 11 years. Many of the SEC’s targets used “expert networks” that pair up industry specialists (such as the doctor in question) with hedge funds wanting insights. All too often the insights given were inside information that should have remained confidential, prosecutors say.

It is the sixth time a current or former employee of SAC has been linked to insider trading while working there; one of its subsidiaries is targeted in the latest probe. Mr Cohen himself has not been named as a defendant now or before, but the complaint places him at the heart of the action in the pharmaceutical imbroglio. Many of the lucrative trades in question were approved by an unnamed “Portfolio Manager A”, described by the SEC as the owner and founder of a hedge fund affiliated with Mr Martoma. It was on the orders of the same “Portfolio Manager A”, who was himself trading in the same shares, that SAC’s position in the soon-to-crash pharma stocks was speedily liquidated.

What the authorities have not proved is that Mr Martoma’s bosses knew he was dealing in privileged information. SAC and Mr Cohen say they acted appropriately and are co-operating with the authorities. Mr Martoma’s lawyer says he is confident his client will be let off.

Mr Cohen has cultivated an aura of secrecy, despite managing $14 billion, one of the biggest hedge-fund piles in the world. Much of that is from his own fortune, estimated at $9.5 billion. His returns since inception in 1992 are among the ten best in the history of the industry. It is a safe bet the SEC and others are not done probing how those profits were generated.

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