DOES A LEOPARD EVER CHANGE ITS SPOTS?

(With Daven Morrison and Jack Bigelow)

Mathew Martoma (nee Ajay Mathew Thomas) has been convicted by a federal jury of insider trading and as of this writing awaits sentencing. Mr. Martoma was found guilty of recommending that SAC Capital Advisors, his employer, sell its shares in two companies after receiving a confidential report discussing problems with the clinical trial of an experimental Alzheimer’s drug. According to a New York Times article, the report came from a key cooperating witness in the case, Dr. Sidney Gilman, an 81-year old researcher affiliated with the University of Michigan. A separate report indicates that the year of these SAC trades, Mr. Martoma received a bonus of $9.3 million.

The Times article reported that Mr. Martoma had cheated 15 years earlier by falsifying his grades at Harvard Law School, using a computer program to change several grades from B’s to A’s. This forged transcript went to 23 judges as part of the application process for a summer job.

The report adds that during a Harvard disciplinary hearing, Mr. Martoma tried to cover his tracks with a fake paper trail of fabricated emails and a counterfeit report from a bogus computer forensics firm he created. He was expelled from Harvard and then changed his name.

A separate article quotes the Harvard administrative report at the time as including this comment: “The Board notes that Mr. Thomas was apparently under extreme parental pressure to excel academically.” According to the Times article, seven additional SAC employees were also criminally charged with insider trading.

Our book, The A.B.C.’s of Behavioral Forensics (Wiley, 2013) examines the behavioral pathology and indicators of cases such as Martoma’s. Specifically, Forbes.com blogger, Walt Pavlo’s blogpost on Mr. Martoma’s emotional state when he was first arrested appears on pp. 239-241. (1) This is an egregious case illustrating disregard for the law to the detriment of others. It oversimplifies to blame his behavior on greed: our book suggests that fraudulent actions are driven by a far more complex set of factors. Incidents of fraud result from at least three factors—opportunity (Martoma received the confidential information and could do something with it), pressure or incentive (it seems that at least a part of his incentive is to be successful in his parents’ eyes; another part may well be the highly affluent and permissive culture in which he worked), and rationalization (justifying his actions to fit his values—we don’t know what the rationalization was, but we can be certain that it was there). In addition to these fraud triangle factors, the element of “capability” that is postulated in the fraud diamond characterization of the antecedents of fraud is clearly demonstrated here. Martoma, by wilfully engaging in such illegal behaviors, provides further evidence for “crime-as-choice” theory.

Martoma’s behavior is consistent with what is known about other bad actors such as the convicted Raj Rajratnam of Galleon Funds, and many others engaging in insider trading. It conforms to the psychopathic continuum (2),  a concept highlighted in The A.B.C.’s of Behavioral Forensics. It also displays, in a long view of his biography tracing back to Harvard, a painful story of a young man trying to be the ideal child his parents wanted him to be: from poignancy, to tragedy, to conviction. This is the steep price paid by an individual committing fraud. At a community level, the price of fraud to our society is immense: among other things, it further erodes trust and integrity in the capital markets. If our equity market place were not an arena requiring trust, then it would not matter. But it does, and the consequences are both tragic and devastating.

  1. See Appendix B, “Supplement to Chapter 8: On the Psychology of an Unindicted Co‐conspirator Sought by Government as a Cooperating Witness.” (pp. 239-41). Ramamoorti, S., Morrison, D.E., Koletar, J.W. & Pope, K.R. ,A.B.C.’s of Behavioral Forensics: Applying Psychology to Financial Fraud Prevention and Detection. Hoboken, NJ; John Wiley & Sons, 2013.
  2. See A.B.C.’s of Behavioral Forensics (Wiley) pp. 114-116

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