Ex-SAC Manager Seeks to Bar Compliance Training EvidencePatricia Hurtado
A lawyer for SAC Capital Advisors LP money manager Michael Steinberg said prosecutors should be barred from showing jurors some of the hedge fund’s training presentations warning against insider trading, arguing that they are prejudicial and there isn’t any evidence he saw them.
The presentations were given from 2006 to 2009 at Stamford, Connecticut-based SAC Capital as part of its compliance efforts. The firm was indicted in July, accused of fostering a culture of illegal trading that reaped hundreds of millions of dollars in profit that was “pervasive and on a scale without known precedent in the hedge fund industry.”
Steinberg, one of eight current or former SAC employees to be charged with insider trading, has pleaded not guilty to conspiracy and securities fraud. Jon Horvath, Steinberg’s former analyst who pleaded guilty and is cooperating with the U.S., is scheduled to testify for the government at Steinberg’s trial set to begin Nov. 18.
Steinberg also argues the U.S. should be barred from showing evidence about the Galleon Group LLC insider-trading probe, arguing there is no “material” link between the two cases. Galleon’s co-founder Raj Rajaratnam, convicted of masterminding one of the biggest insider-trading schemes in a generation, is serving an 11-year prison term.
“The evidence regarding the Galleon insider-trading scandal likely would consist of testimony by the government’s chief cooperating witness, Jon Horvath, that Mr. Steinberg followed the investigation as it unfolded, discussed these news events with his team, and cautioned his team to be careful with whom they dealt,” Steinberg’s lawyer, Barry Berke, said in an Oct. 25 court filing.
“That Mr. Steinberg reacted in this manner to news of the Galleon arrests is neither surprising nor relevant,” Berke said. “It was, in short, the talk of Wall Street and of the hedge fund world in which Mr. Steinberg worked.”
Steinberg is the longest-serving SAC employee to face charges. Six former SAC portfolio managers or analysts have pleaded guilty to insider trading charges and five are cooperating with the U.S.
When U.S. Attorney Preet Bharara in Manhattan announced the criminal indictment and a lawsuit against SAC in July, he said the evidence his investigators collected described an “unprecedented” insider-trading scheme that involved illegal trades in more than 20 companies as far back as 1999. SAC has pleaded not guilty to the charges.
Bharara said SAC management encouraged employees to have an “edge” that included obtaining inside information while “ineffective compliance programs” used “limited measures” that failed to detect or prevent insider trading by SAC’s portfolio managers and research analysts.
Prosecutors shouldn’t be allowed to show jurors many of the PowerPoint slides and training materials about insider trading because they are either “irrelevant” or “unfairly prejudicial,” Berke told U.S. District Judge Richard Sullivan in the filing.
Some of the training slides should be excluded because the government doesn’t have proof Steinberg attended the sessions, Berke said. Those from 2009 came after Steinberg’s alleged crimes and should also be barred, he said.
Jim Margolin, a spokesman for Bharara, declined to comment on Steinberg’s request. Jonathan Gasthalter, a spokesman for SAC at Sard Verbinnen & Co., also declined to comment on it.
Portions of the compliance presentations, including an October 2006 session prepared for SAC by the law firm Wilmer Cutler Pickering Hale and Dorr LLP, were “often oversimplified or incorrect statements about the law of insider trading,” Berke said.
The lawyer included excerpts of slides for the sessions, including a 2006 session which described the U.S. Securities and Exchange Commission’s “current enforcement environment” and the agency’s “Enforcement Landscape.”
“Regulators are looking for examples and SEC believes insider trading by hedge funds is an area of specific concern,” according to a 2006 slide prepared by the law firm.
“There are no simple rules; regularly ask yourself and be able to confirm that material, nonpublic information is not involved before trading or sharing,” according to the presentation. “When in doubt, consult with Legal and Compliance.”
A May 2007 compliance and training seminar included a description of SAC’s code of ethics and warned employees the penalty for insider trading was a 25-year prison term.
“Should any SAC employee receive material, nonpublic information from an issuer, including in a nonpublic manner, follow our policies and procedures and contact Compliance/Legal promptly,” according to the seminar materials. “Do not trade and do not distribute the information.”
At least four former SAC employees have admitted committing insider trading during the period when the compliance sessions were held: Horvath, a former analyst at SAC’s Sigma Capital unit, admitted obtaining and passing illicit tips in 2008 and 2009; former SAC fund manager Richard Lee pleaded guilty in July to trading on nonpublic tips in 2009, and former SAC Capital portfolio managers Noah Freeman and Donald Longueuil both pleaded guilty to being part of a four-year insider-trading scheme, a portion which occurred while they both worked at SAC.
Former SAC fund manager Mathew Martoma was charged with what prosecutors called the largest insider-trading scheme in history, netting as much as $276 million by trading on inside tips about a 2008 clinical trial of a drug intended to treat Alzheimer’s disease. He pleaded not guilty and is scheduled to go to trial in January.
Steinberg is accused of trading on inside tips on Dell Inc. and Nvidia Corp. provided by Horvath. The scheme generated $1.4 million in profits, prosecutors say.
The case is U.S. v. Steinberg, 12-cr-00121, U.S. District Court, Southern District of New York (Manhattan).