After FBI agents raided hedge funds in November 2010, SAC Capital Advisors LP fund manager Michael Steinberg expressed confidence he wouldn’t be tied to illegal tips, his former analyst testified.
Jon Horvath, the analyst, told the Manhattan federal jury at the fund manager’s insider-trading trial yesterday that Steinberg was identified in a newspaper report as the subject of a federal insider-trading investigation tied to John Kinnucan, an expert-networking consultant.
Kinnucan later appeared on television and declared that Steinberg wasn’t the person who the Federal Bureau of Investigation had asked him to secretly record, Horvath said. He recalled other occasions when Steinberg discussed the government probe with SAC analysts.
“I’ve been talking to some people and it turns out the further you are from the source, the more difficult it is to connect you to the source,” Horvath said Steinberg told the group during one conversation. “Therefore, in this situation, because I’m so far from the source, I’m OK.”
Steinberg, 41, 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. Horvath and five other people in the insider-trading ring have pleaded guilty and are cooperating with the U.S.
SAC, founded and owned by billionaire Steven A. Cohen, 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. Cohen hasn’t been charged with a crime.
Horvath has testified he funneled illegal tips to Steinberg about Dell Inc. and Nvidia Corp. that he got from analysts at other hedge funds. Manhattan U.S. Attorney Preet Bharara alleges Steinberg made more than $1.4 million trading on the information from 2007 to 2009.
Steinberg’s lawyer, Barry Berke, questioned Horvath on cross-examination yesterday about his claim that the fund manager directed him to get “edgy, proprietary information” after a bad stock trading loss in August 2007.
Horvath testified earlier in the trial that it was only after that directive was issued that he started feeding Steinberg the inside information.
Berke showed Horvath a series of SAC e-mails that reminded analysts to pursue “edgy” and “proprietary” information that could be used to trade, including some sent to him on his first day on the job at the Stamford, Connecticut-based firm.
The defense lawyer also confronted the former analyst with excerpts of a diary he had kept called, “Jon’s Trading Rules.” In the diary, Horvath had written “Ask yourself in each trade, what do I have that is proprietary?”
Horvath testified he hadn’t written the entry before joining SAC in 2006 and that it had been cut and pasted from an SAC memo.
Berke questioned Horvath as to what he told Steinberg about the arrangement he had with his friend, Jesse Tortora, a Diamondback Capital Management LLC analyst.
Horvath has testified that Tortora supplied him with illegal tips on Dell that he passed on and that Steinberg used for trades.
“You didn’t tell him you were going to do something illegal?” Berke asked.
“No, I didn’t tell him explicitly,” Horvath said.
Berke is scheduled to continue his cross-examination of Horvath today.
Jonathan Gasthalter, a spokesman for SAC, declined to comment on the trial.
Earlier yesterday, Horvath described the mood at SAC in the wake of a series of insider-trading prosecutions that began with the October 2009 arrest of Galleon Group LLC co-founder Raj Rajaratnam. He said SAC analysts and fund managers discussed how the case included wiretaps.
“Mike mentioned to me, ‘Don’t talk to anyone you don’t really trust because people are running around wearing a wire,’” Horvath said.
Horvath testified that he pleaded guilty just weeks before his trial was to start because he feared being deported to his native Sweden.
The former analyst said he was at a conference in Arizona with Steinberg when the FBI conducted the hedge-fund raids. He said Steinberg approached him and asked, “What are you going to tell the FBI when they ask how good Jesse was on Dell?” Horvath said.
“I’m going to say Jesse was quite good,” Horvath said.
“No, you tell them ‘Jesse was just OK’ on Dell,” Horvath said Steinberg instructed.
In the wake of the insider-trading arrests, Horvath said he had a discussion with Steinberg about an SAC database called “Tamale” in which analysts and fund managers placed the data they collected for making trades.
The U.S. has shown jurors e-mails that Horvath sent to Steinberg and members of Steinberg’s group in Tamale that frequently cited nonpublic information about companies he obtained from Tortora and included references to “JT” and “Dell Checks.”
Horvath said Steinberg told him, “I was trying to have this Tamale database removed but I was told by SAC I just can’t do it. I just can’t have it removed.”
The case is U.S. v. Newman, 12-cr-00121, U.S. District Court, Southern District of New York (Manhattan).