Nov. 27 (Bloomberg) -- Michael Steinberg, a fund manager at SAC Capital Advisors LP’s Sigma unit on trial for insider trading, sought “edgy proprietary information” to trade on, his former analyst told a Manhattan federal jury.
Jon Horvath, 44, the government’s star witness against the portfolio manager, testified that after a stock trade he recommended to Steinberg lost about $2 million in August 2007, Steinberg summoned him to his desk one day after work. Horvath said the trade had been based on legitimate research.
Steinberg confronted Horvath about the loss saying, “I can day-trade these stocks and make money by myself. I don’t need your help to do that. But what I need you to do is get me edgy, proprietary, market-moving information that we can use to make money on these stocks,” Horvath quoted Steinberg as saying.
Looking “tense,” Steinberg stated, “You need to talk to your contacts at the companies, bankers, consultants, and leverage your peer network to give me that information,” Horvath said.
Steinberg, 41, who has pleaded not guilty, is charged with conspiracy and four counts of securities fraud. Prosecutors in the office of U.S. Attorney Preet Bharara allege Steinberg earned more than $1.4 million in illegal profits in Dell Inc. and Nvidia Corp. by trading on tips Horvath got from a group of friends and gave to him.
Assistant U.S. Attorney Antonia Apps asked Horvath what he understood Steinberg to be asking him to do.
“I thought he wanted me to cultivate sources of nonpublic information, both material and nonmaterial public information, but there was an emphasis on material nonpublic information,” Horvath replied.
Apps asked what he thought would happen if he didn’t supply such information.
“I thought my job was in danger,” Horvath said.
“What do you mean by that?”
“I thought he would fire me.”
Horvath said he began to reach out to friends with contacts in technology companies, such as Jesse Tortora, who once worked at Intel Corp. and then was an analyst at Prudential Equity Research in San Francisco. By 2007, Tortora was an analyst at Diamondback Capital Management LLC, Horvath said.
Tortora provided him with nonpublic information he obtained from a friend who once worked at Dell and still had contacts there, he said. Tortora regularly sent him e-mails on data such as Dell revenue for about eight quarters from 2007 to 2009, Horvath said.
Steinberg later began trading on the Dell tips he provided in January 2008, when the portfolio lost $1 million, he said. The U.S. said Steinberg later earned more than $1 million after trading on Dell in August 2008.
Horvath said that sometime in mid-2008 he told Steinberg the Dell tips were from Tortora.
“I had told Mike that Jesse had a contact at Dell, inside the company,” he said.
Tortora’s information was put into an SAC database of trading ideas, called “Tamale,” to which Steinberg and his team had access, he said. If he coded the entry with three stars or more, it would automatically be sent to Steinberg and everyone on his team, he said.
While SAC didn’t retain e-mails until after September 2008, excerpts from the database, which was displayed for jurors today, show that Horvath frequently included in his memos e-mails and information about Dell’s company revenue, gross margins and operating expenses that Tortora provided him, and usually referred to him as “Jesse” or “JT.”
Horvath, who didn’t know Tortora’s source, said he frequently transcribed Tortora’s tips into the Tamale system after speaking with him. Several of his entries were made minutes after Tortora and Horvath exchanged e-mails or instant messages or spoke on the telephone, records show.
A March 24, 2008, Tamale entry Horvath sent, under the header “JT checks,” said that Dell was going to have a restructuring announcement, and “PLS KEEP RESTR TO YOURSELF-JT.” The information about the restructuring wasn’t public, Horvath said.
Apps showed jurors an e-mail Steinberg sent him about Dell later that same day which Horvath said “matches up exactly with the e-mail I sent Mike Steinberg.”
Three days later, Dell made an announcement which Horvath testified was “right on” the information Tortora provided him. The accuracy of Tortora’s information gave Horvath “conviction” the tips could be relied upon for trades, he said.
“It gave me more conviction in his checks and that they were coming from inside the company, from someone that had a good visibility to the high-level income statement and the overall business and strategic actions that they were taking,” Horvath said.
It was Horvath’s second day on the stand. He pleaded guilty last year to passing tips to the fund manager, just weeks before his insider trading trial was to begin. The U.S. says he was part of a group of hedge fund analysts and technology company employees who swapped nonpublic information. Six members of the group, including two analyst friends of Horvath’s, have pleaded guilty and are cooperating with the U.S.
Defense lawyer Barry Berke told jurors in his opening statements that Horvath implicated Steinberg when he realized his former co-conspirators were set to testify against him and “traded his freedom for that of another,” Berke said.
Horvath is to continue his testimony when court resumes Dec. 2.
Steinberg is one of eight SAC employees that the government says engaged in insider trading and the first of two fund managers to go to trial. Six others have pleaded guilty. The most serious charge of securities fraud carries a term of as long as 20 years in prison.
SAC, which was charged with insider trading by Bharara’s office in July, offered this month to plead guilty and pay a record $1.8 billion fine. A federal judge hasn’t said whether she will accept the plea.
The case is U.S. v. Newman, 12-cr-00121, U.S. District Court, Southern District of New York (Manhattan).
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