SEC’s NET Gets EVER Closer to Steven Cohen

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Michael Steinberg

The U.S. Securities and Exchange Commission (SEC) continues to nip at Steve Cohen, the hedge fund billionaire and CEO of the $16 billion company SAC Capital’s heels. Last week, the Feds arrested one Michael Steinberg, a former SAC portfolio manager and trusted lieutenant of Stevie at his multi-million dollar apartment in New York’s Park Avenue. The alleged charges are again that of insider trading and it is now the ninth case against SAC employees.

Michael Steinberg is accused of illegally trading in the shares of Dell and Nvidia based on insider tips that he allegedly received and which resulted in a profit around $1.4 million to Sigma Capital, an SAC affiliate company in which Steinberg conducted his portfolio management activities since 2003.

The case against Steinberg comes soon after Jon Horvath, a former analyst at the same Sigma unit and under Steinberg’s supervision, pleaded guilty to insider trading charges relating to illegal trading in the same companies. In what will be a fillip to the SEC’s case, the cooperation of Horvath will potentially prove key in establishing a connection with Steinberg.

It was in August 2008 that Horvath allegedly received the confidential information about Dell from Jesse Tortura, then an analyst at Diamondback Capital and who in turn obtained it from Sandeep Goyal, a tech analyst working at another company who received the information from colleagues at Dell.

In May 2009, Danny Kuo, an analyst at Whittier Trust Co. also passed insider information on Nvidia to Tortura and Horvath who gave it, allegedly to his portfolio manager, Michael Steinberg.

Even though the SEC can prove SAC Capital has, shall we say, strangely ‘extremely well-timed’ transactions in the shares of both Dell and Nvidia, and Horvath’s testimony against Steinberg, there are still potential issues due to the many “ifs” and “somethings” in this case. That Michael Steinberg traded in Nvidia and Dell shares on the information passed to him by his analyst, Jon Horvath is undeniable. But, he can very well allege he thought the information passed to him was the result of perfectly normal research conducted by Sigma employees and that he didn’t know it was the result of an insider tip.

It is usually much more easier to prove insider trading when it is conducted by an actual insider or someone with strong connections to him. In this case, the former SAC Capital employees were inside a large network, where insider information was traded, but with the person trading on the insider information being relatively far removed from the person tipping it. Question is – “did he knowingly trade on inside information” – this will likely prove difficult for the Fed’s to pin on Steinberg by virtue of the middleman Horvath – in effect it will probably end up as “his word against mine”.

This new case against Michael Steinberg comes just two weeks after SAC agreed to pay a record $616 million in civil penalty to settle two insider trading lawsuits. The first involved Matthew Martoma, a former SAC employee illegally trading in the shares of two pharmaceutical companies which resulted in a record profit of $275 million (as a mix of profit and also avoided losses). The second is exactly the case in which Steinberg is allegedly involved and which resulted in a profit of just $1.4 million from trading in Dell and Nvidia shares on insider tips.

Even though the SEC was able to press SAC to agree on a multi- million “no blame” deal, it seems it hasn’t been experiencing the same kind of luck in getting the necessary links to get top managers as Martoma and Steinberg charged and convicted. The proof that is required to pin on Martoma and Steinberg that they traded illegally seems to be a mountain to climb.

With nine trading scandals now and four former employees who have already pleaded guilty in less than four years, it is becoming tougher for SAC Capital to conduct business as usual but, with more than 50% of assets under management being from Steven Cohen and his employees the impact on his company is proving negligible. Unless of course the SEC continues extracting chunks of $600 million in civil penalties…

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