SAC Capital Advisors LP’s Michael Steinberg became the fund’s longest-serving manager to be convicted of insider trading in a U.S. victory that may increase pressure on his accused one-time colleague, Mathew Martoma, to cooperate in the probe of founder Steven A. Cohen.
Steinberg, 41, was convicted yesterday of conspiracy and securities fraud after a five-week trial in Manhattan federal court. A jury, after deliberating for little more than one day, found him guilty of using illegal tips on technology stocks provided by his former securities analyst, Jon Horvath, to reap more than $1.4 million in illicit profits.
U.S. District Judge Richard Sullivan, who presided over the trial and set April 25 for sentencing, has imposed some of the longest terms on convicted insider traders in the Manhattan courthouse. In 2011, he gave 10 years and four months to Zvi Goffer, an ex-Galleon Group LLC trader who was convicted of leading a scheme in which prosecutors said he made more than $10 million.
Sullivan also presided over a case involving the same illegal tips for which Steinberg was convicted of yesterday. In that case, Sullivan sentenced Level Global Investors LP co-founder Anthony Chiasson, who was found guilty of using illegal tips to make more than $68 million, to 6 1/2 years while his co-defendant, former Diamondback Capital Management LLC manager Todd Newman, got a prison term of 4 1/2 years. Newman made about $3.8 million in illicit profits, the U.S. said.
Each of the four counts of securities fraud that Steinberg was convicted of carries a maximum term of 20 years. The conspiracy conviction carries a maximum of five years.
The jury forewoman in Steinberg’s trial, Demethress Gordon, said in an interview after the verdict that “the subtext” of e-mails presented as evidence in the trial convinced her that he “knew, that he was aware” he was breaking the law.
Last month, SAC Capital agreed to plead guilty and pay a record $1.8 billion for perpetrating an insider-trading scheme stretching back to 1999 that garnered hundreds of millions of dollars in illicit profits. New York federal prosecutors have brought insider-trading cases against 87 people and won convictions against 76 of them as part of a six-year nationwide probe of fund managers, company insiders and so-called expert network firms.
Steinberg’s lawyer, Barry Berke, declined to comment on whether he would appeal the verdict.
Manhattan U.S. Attorney Preet Bharara said after SAC’s plea that his investigation of the Stamford, Connecticut-based hedge fund’s employees continues and the firm’s plea agreement doesn’t provide any individual immunity from prosecution. While SAC’s billionaire founder Cohen, 57, hasn’t been charged with a crime, the U.S. Securities and Exchange Commission filed an administrative action against him in July. The SEC alleges that in August 2008, Cohen traded on the same tip about Dell’s earnings that jurors found Steinberg guilty of using.
George Venizelos, head of the FBI’s New York office, said the government would continue pursuing those accused of insider trading.
“We will continue to work around-the-clock with the United States Attorney’s Office in Manhattan until traders and portfolio managers everywhere stop using inside information as their edge,” Venizelos said in a statement.
Former SAC fund manager Martoma, 39, who has declined to cooperate with prosecutors in the past, is set for trial in Manhattan federal court on Jan. 6 on charges he used illegal tips tied to pharmaceutical company stocks.
“The jury has found what the government contended from the outset; in search of an edge, Michael Steinberg crossed the line into criminal insider trading,” Bharara said in a statement after the verdict. “Like many other traders before him who, blinded by profits, lost their sense of right and wrong, Steinberg now stands convicted of federal crimes and faces the prospect of losing his liberty.”
With SAC’s landmark plea and Steinberg’s conviction, Martoma may see cooperating in the probe as a less risky option than trial, said Anthony Sabino, a law professor at St. John’s University in New York.
“He has to decide if he now has a greater chance of losing and going to prison and decide if it’s too late for a plea bargain,” Sabino said. “This will also strengthen the government’s resolve to press him for the most information he can provide them. They could tell him, ‘Yes, you can get a deal, but only if you deliver the great white whale who is Steven A. Cohen.’”
Martoma, a former manager at SAC’s CR Intrinsic unit, is accused of using inside information on clinical trials of an Alzheimer’s disease drug to earn a profit and avoid losses for a combined benefit of at least $276 million. Martoma has pleaded not guilty.
Jonathan Gasthalter, a spokesman for SAC at Sard Verbinnen & Co., declined to comment on the verdict.
“The facts in Steinberg’s case are totally unrelated to the facts in the case against Mr. Martoma,” Richard Strassberg, Martoma’s lawyer, said in an e-mail. He declined to comment further on the jury’s verdict.
Jennifer Queliz, a spokeswoman for Bharara’s office, declined to comment on how Steinberg’s conviction might affect Martoma’s case.
Steinberg tossed his head backward when the first count was announced by the forewoman as guilty. He was allowed to remain seated having earlier suffered what the judge called a “dizzy spell” when the panel initially entered the courtroom to give the verdict.
Just after Sullivan reviewed the jury form and was about to take the verdict, Steinberg slumped forward in his seat over the defense table. His lawyers caught him before he collapsed. The judge excused the jurors and summoned an ambulance. Steinberg, who didn’t lose consciousness, appeared ashen and walked to the judge’s robing room with his legal team.
“He fainted?” Sullivan asked defense lawyer Berke.
“He had a seizure of some sort,” Berke responded.
Sullivan said a courthouse nurse had examined Steinberg and said his blood pressure was normal. The jury returned and delivered its verdict.
The jury of nine women and three men began weighing the evidence Dec. 17. The panel found Steinberg guilty on all five counts: one count of conspiracy to commit securities fraud, two counts of securities fraud stemming from trades in Dell Inc. in August 2008 and two counts of securities fraud stemming from trades made in Nvidia Corp. in May 2009.
SAC Capital agreed to close its investment advisory business as part of the $1.8 billion deal announced Nov. 4 to end a criminal probe and a money-laundering suit filed by Bharara’s office. Bharara has called SAC Capital “a veritable magnet for market cheaters.”
The judge presiding over SAC’s insider-trading case hasn’t decided whether she will accept the hedge fund’s plea. Executives at SAC, which had $15 billion of assets at the beginning of the year, expect the firm to start 2014 with $9 billion, most of that Cohen’s.
Steinberg, who started at SAC Capital in 1997, was considered by many at the fund to be the “right-hand man” of Cohen, one witness testified during the trial. He joined SAC Capital three years after graduating from college and was part of a group of traders who socialized with Cohen during joint vacations and sporting events. Cohen attended Steinberg’s New York wedding in 1999, according to former colleagues, friends and people with knowledge of SAC.
The son of a doctor, Steinberg grew up in Great Neck, a village on Long Island in New York. After graduating in 1994 from the University of Wisconsin in Madison, Wisconsin, he worked at Wall Street research firm Sanford C. Bernstein before joining SAC at the age of 25.
During the trial, which began Nov. 18, the U.S. called 13 witnesses, including Horvath, the former analyst, who described how he passed nonpublic information about Dell and Nvidia to the money manager from 2007 to 2009. The U.S. said Steinberg used inside information to make more than $1 million by trading on Dell in August 2008 and more than $400,000 on a trade in Nvidia in 2009.
Assistant U.S. attorneys Antonia Apps and Harry Chernoff said Steinberg knowingly traded on illegal tips after Horvath provided the fund manager with numbers on revenue, gross margins and operating expenses ahead of company earnings announcements.
The prosecutors argued that by using e-mails and instant messages, Horvath constantly updated Steinberg with secret Dell data, that the computer-maker was going to miss Wall Street estimates when it announced its quarterly earnings on Aug. 28, 2008.
During deliberations, jurors had requested to see phone charts of calls between Steinberg and Horvath that were presented as evidence as well as e-mails and instant messages from Aug. 1, 2008 to Aug. 31, 2008 between Steinberg and Horvath.
Horvath, who pleaded guilty to insider-trading charges and is cooperating with the U.S., testified he was a member of a “criminal club” of hedge fund analysts who obtained illegal tips from technology company employees that they funneled to their portfolio manager bosses.
Horvath testified he began feeding Steinberg secret tips he obtained from his analyst friends, after the money manager asked him in about August 2007 to get him information that he could trade on. That request, he said, came after a trade recommended by Horvath that was based on legitimate research lost Steinberg’s portfolio more than $1 million.
“I can day-trade these stocks and make money by myself,” Horvath testified, quoting Steinberg. “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.’’
Berke, Steinberg’s lawyer, accused Horvath of being a liar. He told the jury that Horvath was ‘‘walking, talking reasonable doubt’’ and had falsely implicated his client to avoid going to prison for his crimes.
Horvath, Berke argued, ‘‘traded his freedom for that of another’’ when he pleaded guilty last year, six weeks before his own insider-trading trial was scheduled to begin.
In closing arguments on Dec. 16, Berke told jurors that Horvath concealed the true source his information from Steinberg and that some of the data was obtained from Dell and Nvidia investor relations.
Other members of Horvath’s group testified including Jesse Tortora, a former Diamondback Capital Management analyst, who described how the analysts agreed to pool their information and swap the illicit tips based on ‘‘game theory’’ or a study of strategic decision making.
‘‘We decided to work together,’’ Tortora said. ‘‘It allowed us to be more effective, more efficient and more profitable.’’
Both Horvath and Tortora testified that other members of the group included Spyridon ‘‘Sam’’ Adondakis, a former Level Global Investors LP analyst; Danny Kuo, who worked as an analyst at Whittier Trust Co., a South Pasadena, California-based wealth-management company; Ron Dennis, who at the time worked as an analyst at SAC’s CR Intrinsic unit; and Sandeep ‘‘Sandy’’ Goyal, a Neuberger Berman analyst who once worked at Dell.
The U.S. also called Goyal, and a second technology company employee who described how he obtained nonpublic information ahead of earnings announcements and passed it to the analysts. Goyal testified that he fed Tortora inside information about Dell from 2007 to 2009 after Tortora paid his wife about $175,000 in consulting fees.
Goyal testified the illegal tips he obtained were from a friend who worked in Dell’s investor relations department. Steinberg eventually received the information supplied by Horvath, prosecutors said.
Hyung Lim, a former Altera Corp. executive who pleaded guilty to passing illegal tips about his company and Nvidia to the group, told Steinberg’s jury he got information about Nvidia from Chris Choi, a friend from church who worked in the company’s accounting department. Lim told jurors he passed the information to Kuo in exchange for him agreeing to pay off his gambling debts.
Lim said he passed the information to Kuo who shared it with the analysts.
The tip in August 2008 that Dell was going to miss earnings estimates was central to the government’s case.
Tortora and Horvath spoke on the phone for about 10 minutes on Aug. 18, 2008, and then Horvath phoned Steinberg and they spoke for about two minutes, prosecutors said.
About three minutes after Horvath hung up, Steinberg began building a short trading position in Dell, anticipating the stock would drop, the U.S. said. At about 12:38 p.m. that day, Horvath sent Steinberg an e-mail saying, ‘‘Pls keep the DELL stuff on the down low . . . just mentioning that because JT asked me specifically to be extra sensitive with the info.”
Horvath testified he sent that message while he was vacationing in Cabo San Lucas, Mexico, and during their phone call, had forgotten to remind Steinberg about Tortora’s request for secrecy on the trade.
Steinberg and Horvath learned that Cohen had built up a long position on Dell in the days before the earnings announcement, and discussed that they should warn him about their rationale for shorting the stock. Horvath testified that he and Steinberg sought to persuade Cohen to change his position ahead of Dell’s earnings announcement to avoid losing money. There was no evidence during the trial that Cohen knew the trade was based on nonpublic information.
“Nice job on Dell,” Cohen wrote in an e-mail to Steinberg and Horvath the evening of Aug. 28, 2008, after the portfolio manager placed the winning bet that Dell Inc. would miss earnings estimates. Cohen hasn’t been charged with a crime.
The trial provided a rare view into SAC. Jurors saw SAC’s training on compliance policies and “sizing worksheets” that were submitted to vet trades. The government showed jurors dozens of e-mails that Horvath got from Tortora.
Jurors also saw e-mails and trading memos sent to Cohen and the fund’s top traders about the August 2008 Dell trade.
“I have a 2nd hand read from someone at the company,” Horvath said in the Aug. 26, 2008 message to Steinberg and another SAC fund manager, 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.”
Apps and Chernoff showed jurors e-mails that Horvath sent to Steinberg and members of Steinberg’s group in an SAC database called “Tamale” in which analysts and fund managers placed the data on companies they collected.
Horvath testified he often copied portions of the illegal tips he received in e-mails from his friends and added them to Tamale. Steinberg and the analysts and traders who worked for him were recipients of the information, Horvath said.
Some of the e-mails that Horvath entered into the database included references to “JT” and “Dell Checks.”
Horvath said he wasn’t certain the money manager read every one of the e-mails placed in the database. Apps noted in her closing argument that the series of e-mails containing nonpublic information about technology companies exchanged by Horvath and Steinberg included references to “JT” and “JT says.”
Sabino, the law professor, said Martoma has a brief window to decide whether to cooperate. Sabino said that in contrast to the “attenuated chain” between Steinberg and the analyst tippers, Martoma’s case will feature the testimony of two physicians whom the government alleges provided Martoma advance information about the testing of an Alzheimer’s drug.
“With his trial starting Jan. 6, that would leave him about a week of pure hell, realizing that the government’s case against Steinberg has held up and there’s also a likelihood that his case will also result in a conviction,” Sabino said. “Cohen himself will also have a bad holiday season because he has to worry if Martoma will turn on him.”
The case is U.S. v. Steinberg, 12-cr-00121, U.S. District Court, Southern District of New York (Manhattan).