the net continues to close around Steve Cohen…

Steven Cohen has been one of the most successful fund managers of the last few decades. His company SAC Capital has produced an average 30% return per year (no mean feat I can tell you) from its managed funds and currently oversees $14 billion in assets. It’s a tough game to beat the market over the long haul and in which almost all fund managers fail. SAC Capital has been the exception to the rule, beating most of its counterparts and trouncing his benchmark – the S%P 500 in terms of achieved performance. But, as we reported a few days ago, many doubts & whispers have been raised around the legitimacy of those gains (http://www.spreadbetmagazine.com/blog/has-the-sec-finally-caught-up-with-sac-capitals-steve-cohen.html).

The US government has been targeting several past SAC employees in recent months and accusing them of obtaining an “illegal edge” over the market by trading on what is termed “non-public material information”. Seven past employees have now been convicted while the government is going for the big one in trying to build an insider trading case against SAC’s head – Steven Cohen.

Until now, the SEC had not made any formal accusations against the company’s top management. Unfortunately for Mr. Cohen, the siege is tightening and to us, it looks like the odds are against him as the SEC and the US government currently hold a 100% conviction record since they started a crackdown on insider trading. Cohen is smart, of that there is no doubt, but when the US Govt looks to get their clutches into you, there is very little you can do, no matter how much money you have… 

After several charges against SAC’s former fund managers, this time Dell is at the centre of the allegations. In a case against  Todd Newman, a former portfolio manager at Diamondback Capital Management, and Anthony Chiasson, co-founder of Level Global Investors, the Federal prosecutors introduced into evidence several emails involving discussions that allegedly resulted in insider trades on the stock of Dell.

The emails show discussions between Jon Horvath, a former trader at SAC’s Sigma division and his former supervisor Michael Steinberg, about an upcoming Dell’s earnings announcement in 2008. It became clear that Jon Horvath had traded on information received from a Dell insider and that he passed the information to Michael Steinberg. The emails also show that Mr. Steinberg discussed the matter with Steven Cohen but until now the prosecutors weren’t able to get a clear proof that the two used the information to trade. If the SEC can prove this the Mr Cohen is in very hot water indeed…

Mr. Horvath was convicted in September and is currently working with prosecutors which must be sending shudders down Cohen’s spine! Horvath told the US government that he passed inside information about Dell and Nvidia to his portfolio manager, who now has been identified as being Mr. Steinberg. Prosecutors claim the company profited by around $1m in Dell and $400,000 in Nvidia from using this material information. Adding to the already long list of insider trading targets, Jon Horvath also said the company used insider information to trade in Ingram Micro, Seagate, and Sun Microsystems. According to SEC filings, SAC has traded heavily on all those companies.

SAC Capital is a very competitive company where Cohen actively nurtures an environment in which several portfolio managers and analysts competeagainst each other to achieve the best performance. It seems that going the tough and orthodox route of collecting information and analysing it to take investment decisions is too time-consuming and risky, and in many cases doesn’t give the required edge many SAC portfolio managers and analysts would like to have over others. Networking with company insiders proved much more profitable for them. Question is where “networking and mosaic theory” overlap with blatant insider trading… Mr. Cohen looks like he is shortly to find out…