Evidence that SAC Capital Advisors LP founder Steven A. Cohen liquidated his entire position in Dell Inc. after getting a tip from ex-analyst Jon Horvath shouldn’t be included in the trial of SAC portfolio manager Michael Steinberg, U.S. prosecutors said.
Steinberg’s lawyer, Barry Berke, is seeking to include evidence that other SAC fund managers, including Cohen, traded on data provided by Horvath to show it wasn’t considered nonpublic information, Assistant U.S. Attorney Antonia Apps said in a memo filed today in federal court in Manhattan.
Prosecutors said they don't intend to use evidence Cohen and other fund managers traded on Horvath’s tips because evidence about other traders isn't relevant to Steinberg. That's why Steinberg's lawyers should be prevented from using e-mail messages between Horvath and SAC portfolio manager Gabriel Plotkin in the trial set to begin Nov. 18, prosecutors said.
The e-mails at issue were exchanged between the fund managers and Horvath on Aug. 26, 2008, two days before Dell was set to report second-quarter earnings, the U.S. said. Horvath, a technology analyst at SAC, e-mailed his boss, Steinberg, and Plotkin to warn them the computer-maker would miss estimates.
“I have a 2nd hand read from someone at the company,” Horvath began the Aug. 26 message, which provided details on gross margins, expenditures and revenue. “Please keep to yourself as obviously not well known.”
Horvath had obtained the bad earnings news from Jesse Tortora, a friend who received nonpublic information from a Dell employee, prosecutors said. Horvath also learned Cohen held a long position in Dell and notified Steinberg, prosecutors said. Horvath and Tortora, a former analyst at Diamondback Capital Management LLC, have pleaded guilty and are cooperating with the U.S.
“Horvath became aware that the head of the firm, Steven Cohen, held a ‘long position’ in Dell securities, reflecting Cohen had a positive view of the company,” prosecutors wrote. “If Cohen lost money based on a portfolio manager’s recommendation, Cohen was likely to be upset, and the portfolio manager’s losses on the trade would be netted against any furture profits in Cohen’s book.”
Steinberg, who held a short position in Dell stocks and options worth about $8 million, earned more than $1 million as a result of the analyst’s tip, prosecutors said.
Cohen had “research traders” whose job it was to ensure that portfolio managers’ trading ideas were properly communicated to him, prosecutors said. On Aug. 26, 2008, SAC research trader Anthony Vaccarino received an e-mail from Horvath warning him about the new information about Dell earnings and Vaccarino provided the tip to Cohen.
Within minutes after receiving Horvath’s message, Cohen and Plotkin reduced their holdings in Dell, prosecutors said. Cohen, who owned about 500,000 shares of Dell, began “liquidating his entire position” prosecutors said. By the time Dell announced its earnings on Aug. 28, 2008, Cohen avoided losses of $1.7 million in his portfolio and another $1.8 million in a second portfolio, the U.S. said.
“Nice job on Dell,” Cohen wrote to Steinberg and his analyst, according to prosecutors, citing an SAC e-mail.
Plotkin, who held about 1.6 million shares, began selling Dell stock and eventually had reduced his position to about 1 million shares. Plotkin avoided losses of about $2 million, prosecutors said. Plotkin hasn’t been charged with wrongdoing.
The U.S. Securities and Exchange Commission alleged in a July administrative action that Cohen sold millions of dollars in Dell stock within minutes of receiving what regulators called the “highly suspicious” e-mail from Horvath and Steinberg.
Cohen hasn’t been charged with wrongdoing. SAC, based in Stamford, Connecticut, is scheduled to appear in court today to plead guilty to insider trading before U.S. District Court Judge Laura Taylor Swain. The hedge fund was indicted for trading on nonpublic information in a scheme that stretched back to 1999, Manhattan U.S. Attorney Preet Bharara said.
U.S. District Court Judge Richard Sullivan, who’s presiding over Steinberg’s criminal case, hasn’t ruled on the government’s bid to exclude the evidence. Berke, Steinberg’s lawyer, has until Nov. 14 to reply to the government’s request.
Jonathan Gasthalter, a spokesman for SAC, declined to comment about the government’s assertions. Berke didn’t immediately respond to a voice-mail message seeking comment.
The criminal case is U.S. v. Steinberg, 12-cr-00121, U.S. District Court, Southern District of New York (Manhattan).
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