SAC Capital Advisors LP founder Steven A. Cohen traded on tips about Dell Inc. obtained by analyst Jon Horvath from a company insider in August 2008, the U.S. Securities and Exchange Commission said.
The SEC filed an administrative action against Cohen yesterday, accusing him of failing to properly supervise employees at his Stamford, Connecticut-based hedge fund, which has been the focus of a federal insider-trading probe.
In the filing, the SEC said that on Aug. 26, 2008, two days before Dell was to report earnings, Horvath warned SAC portfolio manager Michael Steinberg in an e-mail that one of his sources said the computer-maker’s gross margins would be lower than analysts had expected.
“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 in the e-mail, which also included a detailed list of reasons that provide Dell operating expenses and revenue. He then added, “Please keep to yourself as obviously not well known.”
While the SEC didn’t file an insider-trading lawsuit against Cohen, the agency’s administrative action alleges he sold off more than $11 million in Dell stock within minutes of getting a copy of a “highly suspicious” e-mail by Horvath and Steinberg.
The SEC action also shows that the U.S. has amassed more evidence against Cohen, including telephone toll records and e-mails, than was previously known.
In March, Steinberg was indicted by federal prosecutors in New York for insider trading in Dell in these August 2008 trades, making an illicit profit of $1 million based on Horvath’s tip. Steinberg has pleaded not guilty and is scheduled to go to trial in November while Horvath has pleaded guilty to funneling illicit tips to SAC fund managers and is cooperating with Manhattan U.S. Attorney Preet Bharara’s crackdown on insider trading.
While the U.S. previously presented Horvath’s e-mail at a federal criminal insider-trading trial in December, showing that he was consulted on the Dell trade, this is the first time the U.S. has said Cohen got a copy of the Horvath e-mail and traded on its contents.
The SEC doesn’t say Cohen was aware that Horvath’s information was improperly obtained, only that he was a recipient of the analyst’s “highly suspicious e-mail which reflected the clear possibility that Steinberg and Horvath were unlawfully in possession of material nonpublic information,” the SEC alleged.
According to the SEC, Cohen was working from his vacation home on New York’s Long Island on Aug. 25 and 26th when Horvath and Steinberg realized he was holding a long position in Dell that was contrary to the information Horvath was getting from an insider at the Round Rock, Texas-based computer maker.
Cohen had begun purchasing Dell stock on the morning of Aug. 25, 2008, and eventually held 450,000 shares at a cost of more than $11 million, the SEC alleged.
After Horvath received an e-mail alerting him that Cohen’s position was contrary to Steinberg’s, Horvath notified the fund manager, “Steve is long Dell,” regulators said. Steinberg and the analyst discussed whether to tell Cohen their view on Dell.
By 9:31 a.m. on Aug. 26, Cohen held 500,000 Dell shares, the agency alleged. At 1:29 p.m., an SAC employee forwarded Horvath’s e-mail to Cohen on the phone and 10 minutes later, Cohen began selling off Dell stock, regulators said. By 3:49 p.m., Cohen had dumped his entire Dell position, the SEC alleged.
While there is no evidence that Cohen knew Horvath had illicitly obtained the information, the SEC said, Cohen was “looped into a highly suspicious e-mail” and “failed to take prompt action to determine whether an employee under his supervision was engaged in unlawful conduct.”
Horvath’s e-mail first emerged at the trial of two fund managers who were arrested and charged with being part of a group of portfolio managers, analysts and insiders at technology companies that funneled nonpublic information to each other.
Of the eight people charged by the U.S. in the scheme, six have pleaded guilty to insider trading and are cooperating with the U.S.
Two fund managers who went to trial, Level Global Investors LP co-founder Anthony Chiasson and former Diamondback Capital Management LLC portfolio manager Todd Newman, were convicted by a federal jury in New York of securities fraud and conspiracy. Newman was sentenced to 4 1/2 years in prison while Chiasson was sentenced to 6 1/2 years. Both are free pending appeal.
“The SEC’s administrative proceeding has no merit,” Jonathan Gasthalter, a spokesman for SAC, said in a statement yesterday. “Steve Cohen acted appropriately at all times and will fight this charge vigorously. The SEC ignores SAC’s exceptional supervisory structure, its extensive compliance policies and procedures, and Steve Cohen’s strong support for SAC’s compliance program.”
Barry Berke, a lawyer for Steinberg, and Jerika Richardson, a spokeswoman for Bharara, declined to comment on the SEC’s administrative action.
The criminal case against Steinberg is U.S. v. Steinberg, 12-cr-00121, U.S. District Court, Southern District of New York (Manhattan).