SAC Capital Advisors LP fund manager Michael Steinberg reaped “big money” on illicit tips on Dell Inc. and Nvidia Corp. funneled to him by his analyst, Jon Horvath, a prosecutor told a Manhattan federal jury.
After some of the information that Horvath provided resulted in unprofitable trades, Steinberg summoned the analyst to his desk in mid-2007 following a particularly large trading loss and gave him an ultimatum, Assistant U.S. Attorney Antonia Apps said yesterday in her opening statement.
“Michael Steinberg told Jon Horvath he needed to get ‘edgy proprietary information’ -- the kind of information he could make money on, the kind of information that would give him the illegal edge he needed,” Apps said.
Steinberg, one of eight SAC employees to be charged with insider trading by the U.S., is the first to go to trial. The hedge fund owned by billionaire Steven A. Cohen agreed about two weeks ago to plead guilty as part of a record $1.8 billion settlement with the government over charges it fostered a culture of rampant insider trading.
Apps said that Horvath, who pleaded guilty and agreed to testify against Steinberg, was part of a chain of friends who obtained revenue data about technology companies ahead of earnings announcements and swapped the information with each other and provided it to their friends and to the portfolio managers they worked for.
“The defendant knew when he got his hands on that stolen business information he chose to break the law,” Apps told jurors. “Why? To make big money for himself and for the hedge fund. That, ladies and gentlemen, is securities fraud and it’s a serious crime.”
Steinberg’s defense lawyer, Barry Berke, told jurors in his opening that in September 2012, Horvath was set to go to trial for insider trading in the same stocks and decided instead to implicate his former boss for crimes the analyst committed and avoid going to prison.
“You will see that the reason that we are here is because the government’s star witness, Jon Horvath, was trapped,” Berke said.
Berke said at least three members of Horvath’s circle of tipsters had pleaded guilty and were set to testify against him when he decided to cooperate with the government and implicate Steinberg.
“He wanted to avoid jail but he was too late, his circle of friends had pleaded out,” Berke said. “He needed to point the finger at somebody else to get a deal. He traded his freedom for that of another. He chose his self-interest over the truth and claimed Michael Steinberg was involved in his misdeeds.”
Steinberg, 41, who has pleaded not guilty, is the longest-serving SAC employee of those the U.S. has charged in its insider-trading probe. He is charged with one count of conspiracy and four counts of securities fraud, for allegedly engaging in the insider trading scheme that ran from late 2007 to 2009. Each count of securities fraud carries a prison term of as long as 20 years in prison while conspiracy carries a five-year sentence.
The insider trading ring included Spyridon “Sam” Adondakis, a Level Global Investors LP analyst, Jesse Tortora, a former Diamondback Capital Management LLC analyst and Danny Kuo, a former analyst at Whittier Trust Co., Apps said.
Besides Horvath, at least five people, including Tortora and Kuo, have pleaded guilty and agreed to cooperate with the U.S. in the investigation. Tortora and Kuo will testify against Steinberg, Apps said.
Apps told jurors the government’s case includes phone records and e-mails that show the chain of tippers as the nonpublic information passed from technology company insiders to the analysts and finally to Steinberg.
The prosecutor described a sequence of events that she alleged led to Steinberg making at least $1 million from illicit trading in Dell in August 2008.
Horvath was vacationing in Mexico that month when Tortora got news that Dell was going to miss earnings estimates, she told the jury. Phone records show the two had an 11-minute conversation on Aug. 18, she said.
Tortora provided Horvath with updated earnings information about Dell, and records show that Horvath called Steinberg three minutes later and had a conversation that lasted two minutes, she said. One minute after that, Steinberg began shorting Dell stock, she said.
“Keep on the down low,” Horvath said in an e-mail he sent to Steinberg minutes after they concluded their call, Apps said.
Days later, Horvath, who was still in Mexico, sent an e-mail to Steinberg and SAC fund manager Gabe Plotkin, describing his reasoning on shorting Dell, according to Apps.
“I have a 2nd hand read from someone at the company,” Horvath said in the Aug. 26 message, 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.”
Horvath also provided Steinberg with information he got about Nvidia in May 2009 from his circle of friends that allowed the manager to earn more than $400,000 from illegal trading, Apps said.
The jury will hear Horvath describe his crimes and conversations he had with Steinberg, including one in which Steinberg coached him on what to say to the Federal Bureau of Investigation if he was ever questioned, Apps said.
“He will tell you about a conversation in which he told him the information was coming from someone at the company,” Apps said. “Afterward, Steinberg asked Horvath what he would say to the FBI about Tortora and Dell if it came up,” she said. “The defendant told him what he wanted him to say instead.”
Dan Berkowitz, SAC’s chief financial officer, testified today that during the period of 2007 to 2009, SAC had assets under management of $10 billion to $17 billion. He said that in 2007, when the U.S. said the scheme began, SAC paid Steinberg a $4.94 million bonus and his portfolio generated more than $27 million. In 2008, he received a bonus of more than $1.54 million and his portfolio made more than $13.6 million. In 2009, his bonus was more than $2 million and his portfolio made more than $18 million in profits.
If a fund manager had a particularly good idea, Berkowitz said it could be pitched to Cohen for his personal trading in the “Cohen Account.” Berkowitz said an internal review of SAC records show that one of Steinberg’s recommended trades offered to Cohen in 2009 generated a profit and Steinberg was paid an extra bonus of $26,000.
U.S. District Court Judge Richard Sullivan, who is presiding over the case, has told jurors that the trial should last about four weeks.
The jury of nine women and three men includes two accountants and a physical therapist.
Manhattan U.S. Attorney Preet Bharara cited Horvath’s tips in the July indictment of SAC that accused the firm of reaping hundreds of millions of dollars in illicit profits in insider trading that went back as far as 1999.
SAC, based in Stamford, Connecticut, agreed to close its investment advisory business as part of the accord to end both its prosecution and a money-laundering lawsuit filed by Bharara’s office. The federal judge presiding over that case hasn’t decided to accept the hedge fund’s guilty plea.
Two other fund managers who prosecutors said were also recipients of the illegal tips -- Level Global Investors LP co-founder Anthony Chiasson and ex-Diamondback Capital Management LLC portfolio manager Todd Newman -- were convicted by a Manhattan federal jury after a trial last year. Both men are appealing their convictions and remain free as they challenge the case.
Jonathan Gasthalter, a spokesman for SAC at Sard, Verbinnen & Co., declined to comment on Steinberg’s case.
The case is U.S. v. Steinberg, 12-cr-00121, U.S. District Court, Southern District of New York (Manhattan).