SAC Capital Advisors LP fund manager Michael Steinberg was indicted by a federal grand jury on five counts of conspiracy and securities fraud as the U.S. government’s wide-ranging probe of insider trading at the $15 billion firm got one step closer to founder Steven A. Cohen.
Steinberg, 40, worked at SAC’s Sigma Capital Management unit and is the most senior SAC official to be charged. He was one of 15 portfolio managers handling technology, media and telecommunications stocks before being placed on leave in September, said a person with knowledge of the matter. He faces as long as 20 years in prison if convicted.
The indictment unsealed yesterday alleged he traded on insider tips obtained from convicted SAC technology analyst Jon Horvath. U.S. District Judge Richard Sullivan in Manhattan in December ruled Steinberg was an uncharged co-conspirator in a $72 million scheme that also involved Level Global Investors LP co-founder Anthony Chiasson, ex-Diamondback Capital Management LLC portfolio manager Todd Newman and analysts who obtained and swapped illegal tips about technology companies.
“Steinberg was another Wall Street insider who fed off a corrupt grapevine of proprietary and confidential information cultivated by other professionals who made their own rules to make money,” Manhattan U.S. Attorney Preet Bharara said. “With lightning speed in at least one case, Mr. Steinberg seized on the opportunity to cash in and tried to keep his crime quiet.”
Steinberg, who pleaded not guilty, was led into a Manhattan courtroom yesterday morning in handcuffs, dressed in a dark sweater and slacks. Looking straight ahead during the 30 minute hearing, his bail was set at $3 million, secured by $100,000 personal bond and two co-signers. His travel was limited to New York, Connecticut, Florida and California.
During the court appearance, Steinberg said “yes” three times when asked if he understood his rights and “not guilty, your honor” when asked for his plea.
Assistant U.S. Attorney Antonia Apps said the case is based “largely” on cooperator testimony. While Steinberg was caught “on a handful” of wiretaps, prosecutors don’t expect to introduce them at trial, Apps said.
This case “involves a lot of paper, a lot of information over a long period of time,” Sullivan said. It focuses on trades from 2008 and 2009 and may not generate many new details about SAC trading, he said. “Much of the information” has “been publicly available.” The next hearing was set for May 3.
In court yesterday, defense lawyer Barry Berke suggested prosecutors may be involved in “judge shopping” by bringing the case as part of earlier charges against others. By using such a superseding indictment, prosecutors ensured the case was assigned to Sullivan instead of another judge, Berke said.
Sullivan has handed down severe sentences in financial crime cases, sending ex-fund manager James Nicholson to prison for 40 years, former Galleon Group LLC trader Zvi Goffer for ten years and technology investor Alberto Vilar for nine years.
He also issued a ruling in an earlier insider case that defense lawyers claimed lessens the government’s burden of proof. Two other judges in the same court have ruled differently.
Sullivan said yesterday that the “odds” were that he would retain the Steinberg case.
“Mr. Steinberg -- don’t believe Mr. Berke,” the judge said in court. “I’m not as bad as he says.”
The indictment of Steinberg, who was taken into custody at 6 a.m. at his Manhattan home, is the latest development in a recent acceleration of the government’s five-year probe of insider trading on Wall Street, and particularly hedge funds.
According to internal e-mails and two people familiar with the matter, Steinberg and SAC fund manager Gabriel Plotkin both were recipients of inside information passed to them by Horvath, the convicted SAC analyst. Plotkin hasn’t been accused of wrongdoing.
Steinberg is charged with being part of a conspiracy that began in late 2007 and continued until 2009. The U.S. said he received and traded on illegal tips on Dell Inc. and Nvidia Corp.
Steinberg and Horvath were part of a group of analysts and fund managers who swapped and traded on nonpublic information obtained from insiders at technology companies, the U.S. said.
The U.S. Securities and Exchange Commission, which filed parallel lawsuit against Steinberg yesterday, said earlier this month that Horvath funneled nonpublic information on technology stocks to two unidentified portfolio managers at Cohen’s hedge fund. Both men then traded on the information, reaping more than $6 million for SAC Capital units. The men were Steinberg and Plotkin, according to the SAC e-mails. The e-mails were also cited in the grand jury indictment.
Steinberg, who has worked at SAC Capital since 1997, is one of nine current or former employees of the hedge fund to be tied by U.S. authorities to insider trading. Cohen, who has denied any wrongdoing, hasn’t been charged or sued by the government.
“Steinberg’s arrest is the latest in the FBI’s campaign to root out insider trading at hedge funds and expert networking firms, resulting in more than 70 arrests so far,” George Venizelos, head of the FBI’s New York office, said in a statement. “Steinberg was at the center of an elite criminal club, where cheating and corruption were rewarded. Research was nothing more than well-timed tips from an extensive network of well-sourced analysts. The law is clear for everyone including Mr. Steinberg. Trading on inside information is illegal.”
In November, the U.S. indicted Mathew Martoma, a former fund manager for SAC’s CR Intrinsic Investors unit, in 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. He has pleaded not guilty to the charges and is awaiting trial.
Steinberg has had the longest tenure at SAC of those the U.S. has tied to its insider-trading probe. Berke said yesterday his client is “caught in the crossfire of aggressive investigations.”
“Michael Steinberg did absolutely nothing wrong,” the attorney said in a statement. “His trading decisions were based on detailed analysis as well as information that he understood had been properly obtained through the types of channels that institutional investors rely upon on a daily basis.”
Jonathan Gasthalter, a spokesman for Stamford, Connecticut-based SAC, said Steinberg “has conducted himself professionally and ethically during his long tenure at the firm.”
George S. Canellos, acting director of the SEC’s Division of Enforcement, said in a statement that “Steinberg essentially got an advance copy of Dell and Nvidia’s quarterly earnings announcements, allowing him to trade on tomorrow’s news today.”
On March 28, another Manhattan federal judge expressed skepticism at a provision of a $602 million settlement by SAC with the SEC. The hedge fund will have to wait to learn if the proposed insider trading accord can go forward, after U.S. District Judge Victor Marrero raised questions over whether the hedge fund should be allowed to avoid admitting it did anything wrong as part of the deal.
The accord would resolve SEC claims that SAC Capital and CR Intrinsic profited from alleged illegal tips received by Martoma. A related $14 million SEC settlement is before another judge.
As part of the March 15 SEC agreement, the regulator sued Sigma, describing Horvath’s passing of inside information and expanding what the U.S. had previously said about the insider trading at SAC.
Horvath, who pleaded guilty in September, admitted he provided illegal tips to his portfolio manager, who then traded on them. His co-conspirators obtained material nonpublic information on Dell in August 2008 and about Nvidia in May 2009 from insiders at the two technology companies, he said.
While Horvath never named Steinberg in court, prosecutors alleged during Chiasson and Newman’s trial that Steinberg was the recipient of Horvath’s tips. The tips earned Horvath’s hedge fund manager about $1.4 million, prosecutors said. The SEC said in the March 15 complaint that the analyst’s tips on technology stocks reaped the fund more than $6 million.
Horvath, who worked at SAC’s Sigma unit from 2006 to 2011, is cooperating with the insider-trading investigation by Bharara’s office and the Federal Bureau of Investigation in New York. Steve Peikin, his lawyer, declined to comment.
Horvath told the judge during his plea that he “agreed to obtain and share information about public companies.”
Jesse Tortora, a former analyst who worked for Newman, provided Horvath with the Dell tips and Danny Kuo, a former analyst at Whittier Trust Co., obtained the Nvidia information from Hyung Lim, then an Nvidia employee, according to the government filings today.
“In each instance I provided the information to the portfolio manager I worked for and we executed trades in the stocks based on that information,” Horvath told Sullivan, who presides over his case as well.
During Chiasson and Newman’s trial, assistant U.S. attorneys Apps, Richard Tarlowe and John Zach provided evidence including SAC e-mails that they said showed Steinberg’s state of mind about the information he received from Horvath.
Two days before Dell was set to report second-quarter 2008 earnings, Horvath e-mailed Steinberg and Plotkin to warn that the computer maker would miss earnings estimates.
“I have a 2nd hand read from someone at the company,” Horvath said in the Aug. 26 e-mail, 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.”
The messages exchanged among Horvath, Steinberg and Plotkin show Steinberg consulted with Cohen about the August 2008 Dell trade.
“Guys, I was talking to Steve about Dell earlier today and he asked me to get the two of you to compare notes before the print, as we are on opposite sides of this one,” Steinberg wrote to Horvath and Plotkin.
Prosecutors said Steinberg shorted Dell securities based on Horvath’s information, earning the hedge fund about $1 million. Plotkin is one of 10 portfolio managers at Sigma focusing on consumer stocks. He 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.
The e-mails were made public as part of the month long trial of Chiasson and Newman, who were convicted in December by a federal jury in Manhattan. They face as long as 20 years in prison when they are sentenced by Sullivan later this year.
Sullivan concluded in December that e-mail and instant messages he reviewed showed that Steinberg could have known information he used for trades came from insiders.
“The e-mails that were relayed to Steinberg do indicate to me that he understands the source of the information that he’s getting and he’s trading on it,” Sullivan wrote. “All of that indicates this is inside information from the company that’s not available anywhere else.”
Horvath was one of eight analysts and portfolio managers charged in January 2012 with being part of what Bharara described as “a tight-knit circle of greed” whose members trafficked in confidential information from 2007 to 2009.
Six of those charged in the case have pleaded guilty and agreed to cooperate with the U.S.
Horvath pleaded guilty just weeks before he was set to go on trial with Chiasson and Newman.
Sullivan ruled during Chiasson and Newman’s trial that David Ganek, a Level Global co-founder, was also an uncharged co-conspirator in the case. Both Chiasson and Ganek worked at SAC Capital before starting Level Global.
Ganek hasn’t been charged with any crime. Ganek’s attorney, John Carroll, said in December when asked about Sullivan’s ruling that “both the U.S. attorney and the SEC have been investigating this case for two years and neither has found reason to charge my client.”
Two others who were charged with being part of the scheme pleaded guilty and testified at the trial as prosecution witnesses.
Tortora and Spyridon “Sam” Adondakis, who once worked as an analyst for Chiasson, described for the jury how they swapped nonpublic information obtained from insiders at technology companies. They said they then passed on that information to their portfolio managers who traded on the illegal tips.
At a December hearing outside the jury’s presence during Chiasson and Newman’s trial, Sullivan read aloud an e-mail from Horvath to Steinberg that mentions “JT,” which prosecutors said was a reference to Jesse Tortora.
“P.S. Keep the Dell stuff, especially on the down low,” Horvath said in the e-mail, “because JT asked me specifically to be extra sensitive with this information.”
Apps told the judge that Steinberg took a short position in Dell stock, betting that it would drop, “in a matter of minutes” after receiving Horvath’s message.
“Why would you need to keep this on the ‘down low’ if this stuff is from investor relations?” Sullivan said, adding: “That doesn’t look good.”
The case is U.S. v. Steinberg, 12-00121, U.S. District Court, Southern District of New York (Manhattan).