US probe widens into 'circle of greed' at SAC

At least six employees at the hedge fund have so far been tied to allegations of insider trading

PUBLISHED : Monday, 18 March, 2013, 12:00am
UPDATED : Monday, 18 March, 2013, 2:17am

Jon Horvath, a former analyst at SAC Capital Advisors who pleaded guilty to passing illegal tips to a manager at the hedge fund, also funnelled inside information to another supervisor, US regulators said in a lawsuit that may help accelerate the massive criminal investigation of SAC and its founder, Steven Cohen.

The Department of Justice and the Securities and Exchange Commission previously identified only one SAC fund manager that they said received and traded on illicit tips from Horvath. Since the government's five-year crackdown on insider trading began, at least six current or former SAC employees have been tied to allegations of insider trading. Four have pleaded guilty to federal charges.

SAC agreed last week to pay a record US$616 million to settle SEC allegations that Sigma Capital Management and another affiliate, CR Intrinsic Investors, made illegal trades using non-public information. Cohen has not been sued personally by the commission.

Horvath, who was a technology analyst at Sigma from 2006 to 2011, is co-operating with the insider-trading investigation by Manhattan US Attorney Preet Bharara's office and the Federal Bureau of Investigation in New York. Ellen Davis, a spokesman for Bharara's office, declined to comment on the SEC claims. The SEC said its investigation was continuing.

Horvath was charged last year with being part of "a tight-knit circle of greed", described by prosecutors as a group of hedge fund analysts and technology company employees who trafficked in inside information, allowing their funds to reap more than US$72 million in illicit profits.

When he pleaded guilty in September, Horvath told the judge presiding over his case that he provided illegal tips to his portfolio manager, who then traded on the information. While Horvath did not name his colleague in court, prosecutors said during a trial of two co-defendants that SAC manager Michael Steinberg was the recipient of his tips.

US District Judge Richard Sullivan in New York ruled in December that Steinberg was an unindicted co-conspirator in the scheme. Steinberg has denied any wrongdoing.

In his guilty plea, Horvath said he obtained material non-public information on Dell in August 2008 and about Nvidia in May 2009 from insiders at the two technology companies. He said he passed the information to the portfolio manager who supervised him.

Horvath's illegal tips helped SAC earn more than US$6.4 million in profit and avoided losses, according to the SEC complaint.

The SEC filing cited some of the same internal e-mails that were included as evidence in the criminal trial against two of Horvath's co-defendants, Level Global Investors co-founder Anthony Chiasson and former Diamondback Capital Management portfolio manager Todd Newman. They were convicted in December and await sentencing.

In one e-mail sent two days before Dell was set to report second-quarter earnings for 2008, Horvath warned Steinberg and another portfolio manager that the computer maker would miss estimates.

"I have a 2nd hand read from someone at the company," Horvath began the August 26, 2008, message, which provided details on gross margins, expenditures and revenue. "Please keep to yourself as obviously not well known."

The SEC complaint referred to Steinberg as "Portfolio Manager A". Twenty-four minutes after receiving Horvath's e-mail, an SAC fund manager identified by the SEC as "Portfolio Manager B" began selling off Dell stock, according to the complaint.

By the time Dell made its earnings announcement on August 28, 2008, both fund managers reduced their Dell holdings by 600,000 shares, the SEC alleged. In the days that followed, Portfolio Manager A closed out a short position in Dell and multiple options positions, reaping more than US$1 million in profit, while the second fund manager's sale of Dell holdings helped another Sigma unit avoid losses of about US$2 million.