SAC Fund Manager Steinberg Can Challenge Insider Conviction

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Michael Steinberg, a former fund manager with SAC Capital Advisors LP, arrives at federal court for a sentencing hearing in New York, on May 16, 2014.

Michael Steinberg, a former fund manager with SAC Capital Advisors LP, arrives at federal court for a sentencing hearing in New York, on May 16, 2014.

Photographer: Peter Foley/Bloomberg

Former SAC Capital Advisors LP fund manager Michael Steinberg can go ahead and challenge his insider-trading conviction.

Steinberg’s case was held up while a federal appeals court considered a bid by two fund managers to toss their convictions on essentially the same evidence. The court threw out those verdicts, rejected the government’s appeal Friday and on Monday lifted the hold on Steinberg.

Jennifer Queliz, spokeswoman for Manhattan U.S. Attorney Preet Bharara, declined to say whether he would seek review by the U.S. Supreme Court, even as the New York appellate court’s decisions make insider-trading cases tougher to prosecute and imperil other government victories.

The court’s decision last week “reaffirms that Michael Steinberg did not commit a crime and never should have been prosecuted,” Barry Berke, Steinberg’s lawyer, said April 3. “The decision requires his conviction to be thrown out as well.” Berke didn’t immediately respond to a phone call seeking comment on Monday’s decision.

A three-judge appeals panel ruled that, to be found guilty of insider trading, defendants must know their tips came from someone who not only had a duty to keep it secret but also got a benefit for leaking it.

Level Global Investors LP co-founder Anthony Chiasson and ex-Diamondback Capital Management LLC portfolio manager Todd Newman, had their convictions tossed after they argued on appeal that they didn’t know either the identity of the original source nor if the person had received any benefit for leaking it.

Proposed Legislation

More than 80 people have been convicted in federal court in New York of illegal trading during an eight-year probe. Jon Horvath, who pleaded guilty to providing Steinberg inside information and testified against him at trial, was granted a delay in his sentencing until at least July 3 after prosecutors said his cooperation with the U.S. “is ongoing.”

Several members of Congress are proposing legislation to define insider trading in the wake of the appeals court’s decisions.

U.S. Representative Jim Himes, a Democratic member of the House Committee on Financial Services, introduced a bill March 25 that would make it a federal crime to trade on material, nonpublic information that was wrongfully obtained.

Himes, a former Goldman Sachs Group Inc. executive whose Connecticut district is home to major hedge funds, said existing securities laws are “hazy” because of the requirement to prove a tipster personally benefited from a leak. He’s trying to get an insider-trading law passed that will remove that requirement.

‘Clean It Up’

“It’s time to clean it up,” Himes said in an interview Monday. “This is the time, after 80 years, that we need a clear statute forbidding insider trading.”

On Monday, U.S. District Judge Jed Rakoff in Manhattan ruled that two former brokers must face a lawsuit brought by the U.S. Securities and Exchange Commission in an unrelated insider-trading case.

Rakoff ruled there was enough evidence to support an insider trading case against the Benjamin Durant and Daryl Payton, who were among five men who won dismissal of charges they made thousands of dollars on a tip involving International Business Machines Corp.’s $1.2 billion purchase of SPSS Inc.

Both Durant and Payton argued the SEC case should be dismissed, saying they were so far removed from the original source of the inside information, they were unaware what benefit, if any, the tipper got. The SEC said the inside information was obtained from a friend, Trent Martin, who got it from a lawyer who worked on the deal.

In his ruling, Rakoff said there was sufficient evidence to support the new requirement, saying there was evidence both men took steps to consciously avoid learning about the source of the inside information and “took multiple steps” to conceal their trading.

‘Form of Cheating’

Rakoff, who called insider trading “a form of cheating,” said Congress’s failure to pass an insider trading law has left it up to the courts to define it.

“If unlawful insider trading is to be properly deterred, it must be adequately defined,” Rakoff said. “The appropriate body to do so, one would think, is Congress; but in the absence of Congressional action, such definition has been largely left to the courts. This creates difficulties because the courts must proceed on a case-by-case basis.”

The case is U.S. v. Michael Steinberg, 14-2141, U.S. Second Circuit Court of Appeals (Manhattan). The civil case is Securities and Exchange Commission v. Payton, 14-cv-04644, U.S. District Court, Southern District of New York (Manhattan).

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