Preet Bharara, the United States Attorney for the Southern District of New York, announced that Michael Steinberg, a portfolio manager of Sigma Capital Management LLC (Sigma), a division of the Connecticut-based hedge fund SAC Capital, was found guilty today in Manhattan federal court based on his participation in an insider trading scheme. Steinberg was convicted after a five-week jury trial presided over by U.S. District Judge Richard J. Sullivan.
Manhattan U.S. Attorney Preet Bharara said, “The jury has found what the government contended from the outset; in search of an edge, Michael Steinberg crossed the line into criminal insider trading. Like many other traders before him who, blinded by profits, lost their sense of right and wrong, Steinberg now stands convicted of federal crimes and faces the prospect of losing his liberty.”
According to the superseding indictment filed in Manhattan federal court, other court documents, and the evidence presented at trial:
Steinberg traded in the securities of two publicly traded technology companies, Dell Inc. (Dell) and NVIDIA Corporation (NVIDIA), based on inside information that his research analyst Jon Horvath obtained from a circle of analyst friends at different investment firms. Horvath previously pled guilty to insider trading, as did analysts Jesse Tortora, formerly of Diamondback Capital; Spyridon “Sam” Adondakis, formerly of Level Global; Danny Kuo, formerly of Whittier Trust; and Sandeep Goyal, formerly of Neuberger Berman. Steinberg’s trading in Dell and NVIDIA resulted in approximately $1.9 million in illegal profits for his hedge fund.
In particular, Tortora provided Horvath and others with inside information related to Dell’s quarterly earnings (the Dell inside information), which Tortora obtained from Goyal who, in turn, had obtained the information from an employee at Dell (the Dell insider). For Dell’s quarter that was announced by Dell on August 28, 2008 (the Dell announcement), the Dell inside information indicated that Dell would report gross margins that were materially lower than market expectations. In advance of the Dell announcement, Horvath reported this negative inside information to Steinberg.
On August 18, 2008, after a series of calls from the Dell insider to Goyal and from Goyal to Tortora and Horvath, Horvath then called Steinberg. Within a minute of the telephone call between Steinberg and Horvath, Steinberg’s portfolio began shorting shares of Dell. One minute later, Horvath wrote an e-mail to Steinberg stating: “Pls keep the DELL stuff especially on the down low...just mentioning that because JT [Jesse Tortora] asked me specifically to be extra sensitive with the info.” By the end of the day on August 18, 2008, Steinberg had accumulated a net short position of over 167,000 shares of Dell. On August 26, 2008, Horvath confirmed in an e-mail to Steinberg and another portfolio manager at Sigma that Horvath’s Dell information had been based on a “2nd hand read from someone at the company.” Steinberg responded: “Yes normally we would never divulge data like this, so please be discreet.” And on August 27, 2008, Steinberg sent an e-mail to Horvath with the subject line, “Dell action,” in which he asked, “Have u double checked [with] JT this week?” Horvath responded, “Yes he [Tortora] checked in [a] couple days ago, same read no change.” The following day, Steinberg executed additional short trades based on the Dell inside information.
On August 28, 2008, before Dell’s announcement, Steinberg executed or caused to be executed additional short trades. Steinberg also executed or caused to be executed options trades in Dell in advance of the Dell announcement.
After the close of the market on August 28, 2008, Dell publicly announced gross margins that were substantially below market expectations. At the end of the next trading day following Dell’s announcement, its stock price dropped by nearly 14 percent. Shortly thereafter, Steinberg covered his short position and closed out his position in Dell option contracts, resulting in an illegal profit for Sigma of approximately $1 million.
In addition, in 2009, Kuo obtained inside information regarding NVIDIA’s financial results (the NVIDIA inside information) in advance of NVIDIA’s quarterly earnings announcements. The NVIDIA inside information indicated, among other things, that NVIDIA’s gross margins would be lower than market expectations. Kuo obtained the NVIDIA inside information from a friend, Hyung Lim, who received it from an employee at NVIDIA (the NVIDIA insider). In advance of NVIDIA’s May 7, 2009 quarterly earnings announcement (the NVIDIA announcement), Kuo provided the NVIDIA inside information, which he had obtained from Lim, to Tortora, Horvath, and others. Horvath, in turn, provided the NVIDIA inside information to Steinberg, who executed or caused to be executed transactions in NVIDIA in advance of the NVIDIA announcement.
On May 7, 2009, NVIDIA publicly announced gross margins that were substantially lower than the market expected. At the end of the trading day following the NVIDIA announcement, NVIDIA’s stock price dropped by more than 13 percent. Shortly thereafter, Steinberg caused Sigma to liquidate its position in NVIDIA, resulting in an illegal profit for Sigma of over $400,000.
Steinberg, 41, of New York, New York, was found guilty of conspiracy to commit securities fraud and four counts of securities fraud. The conspiracy count carries a maximum sentence of five years in prison and a fine of the greater of $250,000 or twice the gross gain or loss from the offense. Each of the securities fraud counts carries a maximum sentence of 20 years in prison and a fine of $5 million or twice the gross gain or loss from the offense.
Steinberg is scheduled to be sentenced by Judge Sullivan on April 25, 2014.
Mr. Bharara praised the investigative work of the FBI. He also thanked the U.S. Securities and Exchange Commission.
This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which Mr. Bharara serves as a co-chair of the Securities and Commodities Fraud Working Group. The task force was established to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys’ offices and state and local partners, it is the broadest coalition of law enforcement, investigatory, and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state, and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions, and other organizations. Over the past three fiscal years, the Justice Department has filed nearly 10,000 financial fraud cases against nearly 15,000 defendants including more than 2,900 mortgage fraud defendants. For more information on the task force, please visit www.StopFraud.gov.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Antonia M. Apps and Harry A. Chernoff are in charge of the prosecution.
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