SAC Capital Advisors LP fund manager Michael Steinberg told the analyst who gave him inside tips on Dell Inc. that the fund’s founder, Steven A. Cohen, wasn’t aware they were obtained illegally.
Steinberg concealed the true source of the tips, Jon Horvath, the former SAC analyst who worked for him, told jurors in the federal insider-trading trial in Manhattan. Horvath said Steinberg told him at SAC’s Sigma Capital Management offices in Midtown Manhattan that he had told Cohen that the trading recommendations were based on “industry contacts” and “supply chain checks.”
“I was in Mike’s office and he said, ‘I just got off the phone with Steve and I was telling him about Dell,’” Horvath testified yesterday. “I kind of cringed, because I didn’t want to be part of this conversation. Mike said, ‘I told him you had a Dell supply-chain check.’”
Steinberg, 41, who is charged with conspiracy and four counts of securities fraud, is the first of eight current or former SAC employees charged by the U.S. to go to trial. He is accused by prosecutors in the office of Manhattan U.S. Attorney Preet Bharara of earning more than $1.4 million in illegal profits in Dell and Nvidia Corp. by trading on tips Horvath got from a group of friends from 2007 to 2009.
$1.8 Billion Settlement
The e-mails presented in Steinberg’s trial provided a new glimpse into the workings at SAC, the Stamford, Connecticut-based hedge fund founded and owned by billionaire Cohen. SAC agreed to close its investment advisory business as part of a $1.8 billion deal announced Nov. 4 to end a criminal probe and a money-laundering lawsuit filed by the Justice Department. Bharara has called SAC “a veritable magnet for market cheaters.” Cohen hasn’t been charged with a crime.
Assistant U.S. Attorney Antonia Apps asked Horvath yesterday why he cringed when Cohen’s name was mentioned during the conversation in November 2008.
“Because Mike was kind of my buffer,” Horvath responded. “I didn’t want to be there to update Steve all the time. I didn’t want that responsibility. I didn’t want to get involved.”
Steinberg reassured him, saying, “Don’t worry, I didn’t let Steve know you have a good Dell check through Jesse Tortora, I told him you had good data research points,” Horvath said, referring to a Diamondback Capital Management LLC analyst who was his primary source of inside information.
In August 2008, using an illegal tip on Dell that he got from Tortora, Horvath provided information that allowed Steinberg to earn more than $1 million, according to prosecutors.
Hours after Dell had issued its earnings announcement on Aug. 28, 2008, Cohen congratulated Steinberg, Horvath and their team, writing in an e-mail to employees, “nice job on Dell.”
Horvath said he and Steinberg had been alerted just days before that Cohen held a large, long position in the computer maker, believing the stock would do well. Horvath said that position was the opposite of what they were recommending.
While there’s no evidence Cohen knew the trade was based on nonpublic information obtained by Horvath, Horvath and Steinberg rushed to provide him with information on Dell to ensure he didn’t lose money on the trade, according to Horvath. SAC analysts and portfolio managers were obliged to ensure Cohen didn’t lose money on a trade, Horvath said.
“It just wasn’t very good politically,” Horvath said. “Steve didn’t like losing money and you were kind of in his bad book if you lost Steve money.”
Steinberg asked Horvath to write a memo to Gabriel “Gabe” Plotkin, an SAC fund manager, explaining the metrics he was using for a trade that would short the stock. Cohen had based his long Dell position on a recommendation from Plotkin, Horvath said.
Later that day, Horvath, who was on vacation in Cabo San Lucas, Mexico, sent Plotkin and Steinberg an e-mail explaining the metrics he used to make such a trading recommendation.
“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 Aug. 26, 2008, e-mail, which included a detailed list of Dell’s operating expenses and revenue. He then added, “Please keep to yourself as obviously not well known.”
Steinberg, a 15-year veteran of the hedge fund, responded: “Yes normally we would never divulge data like this, so please be discreet. Thanks.”
Prosecutors said in a pretrial memo to the court that minutes after receiving Horvath’s memo, Cohen and Plotkin reduced their holdings in Dell, prosecutors said. Plotkin hasn’t been accused of wrongdoing.
Within minutes of Cohen’s traders getting the Aug. 26, 2008 e-mail from Horvath, Cohen, who owned about 500,000 shares of Dell, began “liquidating his entire position.” By the time Dell announced its earnings two days later, Cohen had avoided losses of $1.7 million in his portfolio and another $1.8 million in a second portfolio, prosecutors said in court papers.
While the jury hearing Steinberg’s case hasn’t been told whether Cohen changed his position, they heard about the congratulatory e-mail the billionaire SAC founder sent Horvath and Steinberg showing his pleasure with the results.
Later the night of Aug. 28, 2008, Steinberg sent Cohen an e-mail replying to the founder’s compliment.
“Thanks ... this ole dog can still hunt,” Steinberg wrote, adding, “Maybe it’s time for the firm to encourage for more collaboration between tech teams?”
Jurors were also shown a Nov. 14, 2008, instant-message exchange between Cohen and Steinberg, ahead of Dell’s earnings announcements. Steinberg wrote in texting shorthand, “Dell, repts Thursday” adding, “maybe u can buy stock and short call too, we’ve been good here if u remember.”
Cohen responded, “call me” adding, “It’s a shame -- cause I can be helpful to you too, but that’s life.”
“Steve, I have an analyst that covers this stock, he has industry contacts, I’m not hiding anything from u,” Steinberg wrote.
“I would prefer to talkon phone,” Cohen responded.
Horvath, who pleaded guilty last year to conspiracy and two counts of securities fraud, is scheduled to testify further today. Steinberg, who is charged with conspiracy and four counts of securities fraud, has pleaded not guilty.
The case is U.S. v. Newman, 12-cr-00121, U.S. District Court, Southern District of New York (Manhattan).