A convicted SAC Capital Advisors LP analyst at the center of a federal criminal probe of insider trading passed inside information to SAC fund manager Gabriel Plotkin, according to internal e-mails and two people familiar with the matter.
The U.S. Securities and Exchange Commission said last week in a court filing that the analyst, Jon Horvath, funneled nonpublic information on technology stocks to two unidentified portfolio managers at Steven Cohen’s $15 billion hedge fund. The men then traded on the information, reaping more than $6 million for SAC Capital. Previously, only one had been identified in a separate court case: SAC fund manager Michael Steinberg.
The SEC’s complaint, filed the same day as its $616 million insider trading settlement with two SAC units, cited the same e-mails included as evidence by prosecutors in the trial of two of Horvath’s co-defendants. In those messages, Horvath passed information that came from inside Dell Inc. and Nvidia Corp. (NVDA), previewing earnings announcements. Steinberg and Plotkin, listed as recipients, exchanged messages with Horvath, according to the government’s evidence.
“Notwithstanding the settlements that SAC Capital has reached with the SEC, which are very narrow in scope, it still leaves the door wide open to further civil litigation and potential criminal prosecution for others mentioned in the SEC’s complaint,” Sabino said.
The government has been charging hedge fund employees and obtaining the cooperation of many as it pursues insider cases, including one against Cohen himself, who is being investigated. Since the five-year crackdown on market corruption began, at least nine current or former SAC Capital employees have been tied to allegations of illegal trading. Four have pleaded guilty. Cohen hasn’t been sued or charged, and has denied any wrongdoing.
Plotkin, 34, didn’t return a message seeking comment left at his home. The SEC’s March 15 complaint against the SAC units didn’t name him or Steinberg, or indicate whether they knew Horvath’s information was obtained illegally. Horvath pleaded guilty and is cooperating with the government.
Neither Steinberg, a 15-year veteran of SAC Capital, nor Plotkin, one of 10 portfolio managers at its Sigma Capital Management unit focusing on consumer stocks, has been accused of any wrongdoing.
Plotkin did “nothing wrong” and “has built a successful career on a commitment to sound fundamental research,” Jonathan Gasthalter, a spokesman for SAC Capital, said in an e-mailed statement yesterday. “Plotkin lost over $6 million that day on a large Dell long position. He owned 1.8 million shares and 3,000 of Oct. 24 call options.”
Plotkin, who lives on Manhattan’s Upper East Side, joined SAC in 2006 and is among the firm’s top portfolio managers, overseeing more than $1 billion, according to a person with knowledge of the firm.
Steinberg was one of 15 SAC Capital portfolio managers handling technology, media and telecommunications stocks before he was placed on leave in September, said a person with knowledge of the matter who asked not to be named because they aren’t authorized to speak about the case.
Steinberg has done “absolutely nothing wrong,” said his lawyer, Barry Berke. “At all times his trading decisions were based on detailed analysis as well as information that he understood had been properly obtained.”
Plotkin’s identity was revealed in e-mails submitted as government evidence in the trial last year of Horvath co-defendants Anthony Chiasson, a co-founder of Level Global Investors LP co-founder, and former Diamondback Capital Management LLC portfolio manager Todd Newman.
Chiasson and Newman were convicted on federal insider trading charges in December and await sentencing in Manhattan federal court. They face as long as 25 years in prison.
A comparison of the SEC’s complaint, filed in the same court, with the e-mail evidence from that trial indicates Steinberg, Horvath’s supervisor, and Plotkin are the two men who executed the multimillion-dollar trades described by the securities regulator.
Ellen Davis, a spokeswoman for Manhattan U.S. Attorney Preet Bharara’s office, and John Nestor, a spokesman for the SEC, declined to comment on the agency’s allegations or the two recipients of Horvath’s e-mails.
The Justice Department and the SEC previously identified Steinberg as the lone Sigma fund manager who traded on Horvath’s tips on Dell, the Round-Rock, Texas-based computer manufacturer, and Nvidia, the Santa Clara, California-based maker of graphics processors. New York-based Sigma, with about $2 billion of assets under management, earned $1.4 million from Horvath’s tips, according to a federal grand jury indictment of him in August.
The SEC’s new complaint against Sigma, filed as part of last week’s SEC settlement of insider-trading claims tied to technology and pharmaceutical stocks, shows that Horvath’s tips on Dell were passed to two fund managers, helping Sigma earn or avoid losses which the U.S. now tallies at more than $6 million.
SAC and its affiliates settled the SEC’s claims of insider trading without admitting or denying wrongdoing. George Canellos, the regulator’s acting enforcement director, said the accord doesn’t preclude the commission from pursuing others at SAC.
The SEC’s investigation of the Stamford, Connecticut-based hedge fund is continuing, Canellos said. While the Justice Department and U.S. Attorney Bharara may initiate criminal prosecutions, the SEC is restricted to lawsuits with no penalty of incarceration.
Davis declined to comment on whether the criminal probe will result in additional prosecutions tied to Horvath’s plea.
Horvath, 43, of San Francisco, a technology analyst at Sigma from 2006 to 2011, pleaded guilty before he was set to go on trial along with Chiasson and Newman. He is cooperating with Bharara’s office and the Federal Bureau of Investigation in New York. His lawyer, Steven Peikin, declined to comment on the case.
The U.S. said Horvath, Chiasson and Newman were members of “a tight-knit circle of greed,” a group of hedge fund analysts and technology company employees who prosecutors said trafficked in inside information, allowing their funds to reap more than $72 million in illicit profits.
During his plea hearing in September, Horvath said he obtained material nonpublic information on Dell in August 2008 and Nvidia in May 2009 from insiders at the two technology companies, which he then passed to an unidentified portfolio manager who traded on his tips. In court, he didn’t name the fund manager who received and later traded on his tips.
During Chiasson and Newman’s trial, prosecutors showed electronic messages that Horvath sent in 2008 to Sigma superiors including Steinberg and Plotkin discussing the Dell trade.
U.S. District Judge Richard Sullivan ruled in December that Steinberg could be considered an unindicted co-conspirator in the insider-trading scheme. The e-mail chain in the criminal trial mirrors that cited by the SEC in its March 15 complaint.
The SEC referred to Steinberg as “Portfolio Manager A” and Plotkin as “Portfolio Manager B.” The two people familiar with the case confirmed Plotkin is Portfolio Manager B. They requested anonymity because they weren’t authorized to speak publicly on the matter.
On Aug. 26, 2008, two days before Dell was set to report second-quarter earnings, Horvath warned Steinberg and Plotkin in his e-mail that one of his sources said the computer-maker would miss earnings estimates.
The SAC e-mails show Steinberg consulted with Cohen about the Dell trade. Steinberg told Plotkin that he and Horvath believed Dell’s gross margin numbers were at risk. The e-mails don’t show whether Steinberg relayed Horvath’s information or whether he or Cohen knew that it was confidential.
“I was talking to Steve about DELL earlier today, and he asked me if to get the two of you to compare notes before the print, as we are on opposite sides of this one,” Steinberg wrote to Plotkin and Horvath, referring to Dell’s Aug. 28 earning’s announcement.
Steinberg told Plotkin that he and Horvath thought Dell’s gross margins were at risk for the quarter and that the computer maker wouldn’t be able to offset a weak gross margin number with better operating expenses.
Plotkin then asked both men the basis for their Dell position, inquiring, “Where are you modeling GM%?,” a reference to gross margin percentage, prosecutors said. “What are your insights?” Plotkin asked, according to the e-mail.
Fifteen minutes later, Horvath responded to both fund managers, providing details on gross margins, expenditures and revenue. Horvath tells both portfolio managers that Dell’s gross margins would miss by 50 to 80 basis points, that would result in an earnings per share miss.
“I have a 2nd hand read from someone at the company -- this is 3rd quarter I have gotten this read from them and it has been very good in the last two quarters,” Horvath said and then gives the detailed list of reasons that include operating expenses and revenue, then adds, “Please keep to yourself as obviously not well known.”
Steinberg responded to both Plotkin and Horvath: “Yes normally we would never divulge data like this, so please be discreet. Thanks.”
Twenty-four minutes after receiving Horvath’s e-mail, the SAC fund manager identified by the SEC as “Portfolio Manager B” began selling Dell stock, according to the complaint.
By the time Dell made its Aug. 28, 2008, earnings announcement, both fund managers had 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 SEC said.
The SEC also alleged insider trading of Dell in 2009, claiming 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 Capital 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.
The SEC in its complaint doesn’t allege that either Portfolio Manager A or Portfolio Manager B knew the information Horvath sent them was material or nonpublic, a prerequisite to any insider trading prosecution.
Of the eight people originally charged with Horvath, six have pleaded guilty to insider trading charges 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.
While Kuo didn’t testify, he provided Horvath with inside information about Nvidia, both prosecutors and the SEC alleged in the new complaint.
Prosecutors last week were granted an adjournment of Kuo’s sentencing after they told Judge Sullivan his cooperation is “ongoing.”
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 Capital make $276 million on illegal tips about an Alzheimer’s drug by trading in shares of Elan Corp. and Wyeth LLC. It was the first case in which Cohen, 56, was directly linked to a trade tied to an insider trading prosecution. Prosecutors said Martoma shared his information with Cohen, who then traded on it. Cohen has denied any wrongdoing.
As part of the SEC’s March 15 accord, SAC agreed to pay more than $600 million to settle the regulator’s lawsuit tied to Martoma’s alleged insider-trading at CR Intrinsic. Martoma has pleaded not guilty to the charges and is awaiting trial in Manhattan federal court. SAC didn’t admit or deny any wrongdoing in the SEC settlement.
The FBI and the SEC are also probing trades that SAC Capital made in shares of InterMune Inc. (ITMN), a Brisbane, California-based biopharmaceutical company, a person familiar with the matter said. That inquiry wasn’t resolved in last week’s settlement.
“The fact that you haven’t heard from the U.S. Attorney’s office doesn’t bode well,” said St. John’s Sabino regarding last week’s SEC settlement announcement. “They’re not jumping in on settling anything yet, which means to me that they may be keeping their options open.”
“In light of Horvath’s guilty plea, there was no way SAC could argue against liability,” he said. “This settlement with the SEC still leaves open all kinds of possibilities, including possible civil suits and prosecutions of others at SAC.”
The criminal case is U.S. v. Newman, 12-00121; the SEC case is SEC v. Sigma Capital, 13-01740. Both are in U.S. District Court, Southern District of New York (Manhattan).
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