SAC Criminal Probe May Speed Up With SEC Allegations
Stock Chart for Dell Inc (DELL)
Jon Horvath, a former analyst at SAC Capital Advisors LP who pleaded guilty to passing illegal tips to one manager at the hedge fund, also funneled inside information to another supervisor, U.S. regulators said in a lawsuit that may help accelerate the massive criminal investigation of SAC and its founder, Steven A. Cohen.
A complaint against SAC’s Sigma Capital Management unit, filed March 15 by the Securities and Exchange Commission in Manhattan federal court, signals the FBI and prosecutors have probably added another target to their criminal probe of SAC fund managers suspected of insider trading at the $15 billion fund.
The Justice Department and the SEC previously identified only one SAC fund manager that they said received and traded on illicit tips from Horvath. Since the government’s five-year crackdown on insider trading began, at least six current or former SAC employees have been tied to allegations of insider trading. Four have pleaded guilty to federal charges.
SAC agreed last week to pay a record $616 million to settle SEC allegations that Sigma and another affiliate, CR Intrinsic Investors, made illegal trades using nonpublic information. SAC and the affiliates didn’t admit or deny wrongdoing in the accord. Cohen hasn’t been sued personally by the SEC.
Horvath, who was a technology analyst at SAC’s Sigma from 2006 to 2011, is cooperating with the insider-trading investigation by Manhattan U.S. Attorney Preet Bharara’s office and the Federal Bureau of Investigation in New York. Ellen Davis, a spokeswoman for Bharara’s office, declined to comment on the SEC claims. The SEC said its investigation is continuing.
‘Circle of Greed’
Horvath, 43, of San Francisco, was charged last year with being part of “a tight-knit circle of greed,” described by prosecutors as a group of hedge fund analysts and technology company employees who trafficked in inside information, allowing their funds to reap more than $72 million in illicit profits.
When he pleaded guilty in September, Horvath told the judge presiding over his case that he provided illegal tips to his portfolio manager, who then traded on the information. While Horvath didn’t name his colleague in court, prosecutors said during a trial of two co-defendants that SAC manager Michael Steinberg was the recipient of his tips.
U.S. District Judge Richard Sullivan in New York ruled in December that Steinberg was an unindicted co-conspirator in the scheme. Steinberg has denied any wrongdoing.
In his guilty plea, Horvath said he obtained material nonpublic information on Dell Inc. (DELL) in August 2008 and about Nvidia Corp. (NVDA) in May 2009 from insiders at the two technology companies. He said he passed the information to the portfolio manager who supervised him.
Horvath’s illegal tips helped SAC earn more than $6.4 million in profit and avoided losses, according to the SEC complaint.
The SEC filing cited some of the same internal e-mails that were included as evidence in the criminal trial against two of Horvath’s co-defendants, Level Global Investors LP co-founder Anthony Chiasson and former Diamondback Capital Management LLC portfolio manager Todd Newman. They were convicted in December and await sentencing.
In one e-mail sent two days before Dell was set to report second-quarter 2008 earnings, Horvath warned Steinberg and another portfolio manager that the computer maker would miss earnings estimates.
“I have a 2nd hand read from someone at the company,” Horvath began the Aug. 26, 2008, message, which provided details on gross margins, expenditures and revenue. “Please keep to yourself as obviously not well known.”
The SEC complaint referred to Steinberg as “Portfolio Manager A.”
Twenty-four minutes after receiving Horvath’s e-mail, an SAC fund manager identified by the SEC as “Portfolio Manager B” began selling off Dell stock, according to the complaint.
By the time Dell made its Aug. 28, 2008, earnings announcement, both fund managers reduced their Dell holdings by 600,000 shares, the SEC alleged. In the days that followed, Portfolio Manager A closed out a short position in Dell and multiple options positions, reaping more than $1 million in profit while the second fund manager’s sale of Dell holdings helped another Sigma unit avoid losses of about $2 million, the U.S. said.
The SEC also alleged insider trading of Dell in 2009, saying that Horvath passed a tip to Portfolio Manager A that Dell was going to beat analysts’ expectations on earnings per share, ahead of an August 2009 announcement.
SAC was able to earn almost $500,000 in profit and avoid $700,000 in losses based on Horvath’s tip, the SEC said.
In May 2009, Horvath provided inside information about Nvidia’s earnings to Portfolio Manager A, allowing Sigma to earn more than $500,000, the SEC said.
Steinberg’s lawyer, Barry Berke, said his client has done “absolutely nothing wrong.”
“At all times his trading decisions were based on detailed analysis as well as information that he understood had been properly obtained thru the types of channels that institutional investors rely up on a daily basis,” Berke said in a phone interview.
Of the eight people charged with Horvath, six have pleaded guilty to insider trading and are cooperating with the U.S. They include Jesse Tortora, a former Diamondback analyst; Spyridon “Sam” Adondakis, an analyst at New York-based Level Global; and Danny Kuo, a former analyst at Whittier Trust Co., a South Pasadena, California-based wealth-management company.
Tortora and Adondakis testified at the trial of Newman and Chiasson. While Kuo didn’t testify, he provided Horvath with inside information about Nvidia, both prosecutors and the SEC alleged.
Prosecutors said Kuo’s cooperation with the U.S. is “ongoing” in a March 14 letter to Judge Sullivan.
In November, the U.S. charged Mathew Martoma, a former fund manager for SAC’s CR Intrinsic Investors, with what prosecutors called the biggest insider-trading scheme in history. Bharara said Martoma helped SAC make $276 million on illegal tips about an Alzheimer’s drug by trading in shares of Elan Corp. and Wyeth LLC (WYE).
SAC agreed to pay $600 million to settle an SEC suit tied to Martoma’s insider-trading at the fund’s CR Intrinsic unit.
Martoma, however, pleaded not guilty in his criminal case and is awaiting trial in Manhattan federal court.
The criminal case is U.S. v. Newman, 12-00121, U.S. District Court, Southern District of New York (Manhattan); the SEC case is SEC v. Sigma Capital, 13-01740, Southern District of New York (Manhattan).
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