The jury in the insider-trading trial of SAC Capital Advisors LP fund manager Michael Steinberg resumed deliberations today in Manhattan federal court for a second day.
The panel of nine women and three men began weighing evidence yesterday against Steinberg, 41, who is charged with allegedly receiving inside information about technology stocks from his securities analyst and using it to make more than $1.4 million in illicit profits.
The jury has sent notes to U.S. District Judge Richard Sullivan requesting documents that were placed into evidence by both sides, including a telephone chart of calls Jon Horvath, the former analyst, made to Steinberg in August 2008, while he was on vacation in Mexico.
Prosecutors said it was during one of those calls that Horvath passed nonpublic information about Dell Inc.’s earnings that Steinberg used to place a trade that resulted in more than $1 million in profit. Steinberg’s lawyer argued during trial that Horvath and the government are incorrect about the timing of the calls.
The jury also asked for Horvath’s 2007 performance review at SAC’s Sigma Capital unit, where he gave himself a poor rating. Steinberg’s lawyer, Barry Berke, argued in his closing argument that Horvath concocted the story about Steinberg’s order to get him proprietary information because he feared he was about to be fired.
During the trial, which began Nov. 18, the U.S. called 13 witnesses, including Horvath and Jesse Tortora, a former Diamondback Capital Management LLC analyst as well as two company insiders.
Berke didn’t call any witnesses and concluded his case by presenting evidence that included a journal Horvath kept on trading called “Jon’s Trading Rules” that he created in August 2006, before he started working at SAC Capital. Berke, in an attempt to show that Horvath was predisposed to seek illegal inside information, read jurors excerpts from the journal in which Horvath wrote, “What do I have that is proprietary?”
The defense lawyer told the jury that the government’s case had “collapsed” because prosecutors failed to prove their allegations against his client.
“The evidence doesn’t come even close,” Berke said, adding that Horvath is “walking, talking reasonable doubt.”
Horvath, who pleaded guilty to insider-trading charges and is cooperating with the U.S., testified he was a member of a “criminal club” of hedge fund analysts who obtained illegal tips from employees of technology companies that they funneled to their portfolio manager bosses.
Steinberg is the longest-serving SAC Capital employee to be charged with insider trading by the U.S. He is one of eight of the firm’s employees to be charged with insider trading by the U.S. and the first to go to trial. Six former employees have pleaded guilty to insider trading. Former SAC fund manager Mathew Martoma, who is charged in the biggest insider-trading scheme in history, is scheduled to go to trial next month.
Horvath testified during Steinberg’s trial that he began feeding his former boss tips after the money manager asked him in 2007 to get “edgy, proprietary information.”
During the seven days he cross-examined Horvath, Steinberg’s lawyer accused him of being a liar who falsely implicated his client to avoid prison. Berke argued that Horvath pleaded guilty last year, weeks before his own insider-trading trial was set to begin and therefore “traded his freedom for that of another.”
Steinberg, who has pleaded not guilty, is charged with conspiracy and four counts of securities fraud for allegedly using inside information to make more than $1 million by trading on Dell in August 2008 and more than $400,000 on a trade in Nvidia Corp. (NVDA) in 2009.
Assistant U.S. Attorney Harry Chernoff told jurors on Dec. 16 that the government’s evidence corroborates Horvath’s testimony. He said records show a pattern of phone calls and e-mails between Horvath and Tortora, the former Diamondback Capital analyst who testified he was Horvath’s source of illegal tips. The calls and e-mails show that Horvath spoke to Steinberg and conveyed inside information, Chernoff said.
“You don’t just have the testimony of Jon Horvath, you have e-mail after e-mail and phone call after phone call, all showing that Michael Steinberg was reacting to and trading on inside information,” Chernoff said.
During the trial, prosecutors showed jurors dozens of e-mails that Horvath received from Tortora and the group that the U.S. argues contained nonpublic information on Dell and Nvidia which Steinberg used to base his trades.
Jurors have also seen e-mails and trading memos sent to SAC founder and owner Steven A. Cohen and the fund’s top traders about the August 2008, Dell trade that’s at the center of the case.
“I have a 2nd hand read from someone at the company,” Horvath said in the Aug. 26, 2008, message to Steinberg and another SAC fund manager, which provided details on gross margins, expenditures and revenue. “Please keep to yourself as obviously not well known.”
Steinberg replied, “Yes normally we would never divulge data like this, so please be discreet. Thanks.”
While no evidence has been introduced showing Cohen knew the trade was based on nonpublic information Horvath had obtained, the former analyst testified that he and Steinberg sought to convince the hedge fund founder in the days before Dell made its earnings announcement to change his trading position in order to avoid losing money.
“Nice job on Dell” Cohen wrote in an e-mail to Steinberg and Horvath the evening of Aug. 28, 2008, after the portfolio manager placed the winning bet that Dell would miss Wall Street earnings estimates.
SAC Capital based in Stamford, Connecticut, agreed last month to plead guilty to securities fraud and wire fraud and pay a record $1.8 billion to end a federal insider-trading probe. Manhattan U.S. Attorney Preet Bharara has called SAC “a veritable magnet for market cheaters.” Cohen hasn’t been charged with a crime.
Berke told jurors Dec. 16 that Horvath’s testimony contained inconsistencies and contradictions, including his claim about the Dell tip in August 2008. Horvath testified he had spoken to Steinberg while he was in the living room of his condominium in Cabo San Lucas, Mexico, yet records show Horvath made the call from a U.S. airport, Berke said.
“The truth holds together,” Berke said. “Everytime Mr. Horvath wants to claim something against Mr. Steinberg, it doesn’t hold together at all.”
Horvath’s testimony that Steinberg told him to get “edgy, proprietary information” after one of Horvath’s recommendations in August 2007 led to a loss in Steinberg’s portfolio of at least $1 million was “incredible,” Berke said.
The defense lawyer said Steinberg’s portfolio actually had its best year in 2007, earning nearly $27.2 million. In 2008, when prosecutors said Steinberg was allegedly trading on Horvath’s illegal tips, the fund manager’s portfolio earned only $13.5 million, Berke said. Horvath concocted the story about Steinberg’s order to get illegal tips because he feared he was failing as an analyst.
“Mr. Horvath didn’t want to lose his job,” Berke said. “He had poor performance reviews when everyone else was doing great and he started breaking the rules.”
During the trial, Tortora described how the analysts agreed to pool their information and swap the illicit tips which was based on “game theory” or a study of strategic decision making.
“We decided to work together,” Tortora said. “It allowed us to be more effective, more efficient, and more profitable.”
Tortora testified that other members of the group included Spyridon “Sam” Adondakis, a former Level Global Investors LP analyst; Danny Kuo, who worked as an analyst at Whittier Trust Co., a South Pasadena, California-based wealth-management company; Ron Dennis, who at the time worked as an analyst at SAC’s CR Intrinsic unit; and Sandeep “Sandy” Goyal, a Neuberger Berman analyst who once worked at Dell.
Goyal and a second company employee testified how they passed illegal tips to the analysts. Goyal said he fed Tortora inside information about Dell from 2007 to 2009 after Tortora paid his wife about $175,000 in consulting fees.
Goyal said he obtained the illegal tips from a friend who worked in Dell’s investor relations department. The U.S. said Steinberg eventually received the information from Horvath to earn more than $1 million on Dell in Aug. 2008 and more than $400,000 in 2009.
Hyung Lim, a former Altera Corp. (ALTR) executive who pleaded guilty to passing illegal tips about his company and Nvidia Corp. to the group. Lim testified he got information about Nvidia from Chris Choi, a friend from church who worked in technology company’s accounting department. Lim, who pleaded guilty to conspiracy to commit wire and securities fraud, told jurors he passed the information to Kuo in exchange for his agreeing to pay off his gambling debts.
The case is U.S. v. Steinberg, 12-cr-00121, U.S. District Court, Southern District of New York (Manhattan).
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