The United States attorney’s office in Manhattan extended its winning streak on insider trading cases on Wednesday when a jury convicted Michael S. Steinberg on conspiracy and four counts of securities fraud. Mr. Steinberg, a portfolio manager at SAC Capital Advisors, is a close associate of the firm’s founder and owner, Steven A. Cohen.
The case presented one of the greatest challenges the Justice Department has faced in its pursuit of insider trading at hedge funds because Mr. Steinberg did not directly receive the information. He was a fourth-level recipient who never dealt with any of the original sources of information, instead obtaining it through an SAC analyst, Jon Horvath.
Unlike cases in which the government obtained incriminating statements through wiretaps and recordings of conversations with cooperating witnesses, the prosecutors had to rely on cryptic email exchanges and the testimony of Mr. Horvath, who pleaded guilty in exchange for a likely reduction in his sentence.
Tipping cases are among the most difficult to prove because they often depend on establishing the credibility of a cooperating witness who has cut a deal with the government. Mr. Steinberg’s lawyer, Barry H. Berke, made Mr. Horvath the focal point of the case, accusing him of lying and telling the jury that he was “walking, talking reasonable doubt.â€
Mr. Berke argued at trial that Mr. Steinberg did not know that information provided by Mr. Horvath on two companies, Dell and Nvidia, was confidential, contending instead that it was just the type of market information anyone could dig up. As Mr. Horvath acknowledged, he never explicitly told Mr. Steinberg that he had received inside information, so proving a violation required finding that there was a tacit understanding about the source.
This is not the first insider trading case that depended primarily on the testimony of a cooperating witness who served as a conduit of inside information. The former hedge fund managers Anthony Chiasson and Todd Newman were convicted in 2012 for trading on the same information involved in Mr. Steinberg’s case, each contending that he did not know it came from a someone inside the companies.
Mr. Steinberg’s case could bring prosecutors a step closer to Mr. Cohen, who has not been charged with a crime but has been accused by the Securities and Exchange Commission of failing to properly supervise SAC employees who allowed insider trading to flourish. The question is whether the latest conviction will push prosecutors to the point that they can bring a criminal case against Mr. Cohen.
It is unlikely that Mr. Steinberg will be willing to turn around and acknowledge he received inside information that he willingly passed on to Mr. Cohen, who would have had to understand that it was being provided improperly. At a minimum, Mr. Steinberg would not be much of a witness for the government, having been convicted over a claim of innocence only to later admit criminality to avoid a harsher sentence.
The conviction sends a message to Mathew Martoma, another former SAC portfolio manager charged with insider trading, that there is a substantial risk in going to trial. Mr. Martoma is accused of obtaining information from a doctor about problems in a drug trial being conducted by the drug makers Elan and Wyeth and then speaking with Mr. Cohen, who ordered the sale of a large block of shares in the two companies to avoid substantial losses.
There is still a chance Mr. Martoma might cooperate with the government by pointing the finger at Mr. Cohen. Although Mr. Martoma’s lawyer has steadfastly maintained his client’s innocence, the prospect of a significant prison term could be influential.
Mr. Steinberg was convicted of earning about $1.9 million, according to the government’s estimate, by shorting the shares of Dell and Nvidia before weak earnings announcements. The federal guidelines recommend a sentence of four to five years for the offenses, well short of the 85-year maximum authorized for the convictions.
Mr. Martoma, on the other hand, is accused of trades that resulted in losses avoided and gains of approximately $276 million. The sentencing guidelines recommend a sentence of 15 to 20 years for a conviction involving that much money, so the substantial punishment may be a powerful motivation to cooperate.
Unlike Mr. Steinberg’s case, Mr. Martoma received the information directly from the tipper, so it will be almost impossible to offer a defense that he did not know it was from an insider. He may try to contend that he kept the source of the information secret when he dealt with Mr. Cohen so that it did not play a significant role in the Elan and Wyeth trades. But Mr. Cohen is unlikely to testify at trial, instead asserting his Fifth Amendment privilege against self-incrimination, meaning that Mr. Martoma may have a difficult time showing that his information was not influential in SAC’s sales.
Mr. Martoma’s trial is scheduled to begin in January, so he has a small window to decide whether he can cooperate and provide incriminating information to the government that makes it worthwhile to enter into a plea deal.
For Mr. Steinberg, who is scheduled to be sentenced on April 25, I expect he is looking at a sentence of three to four years. Judge Richard J. Sullivan of Federal District Court in Manhattan, who presided over the trial, is known to be tough on insider trading defendants.
Judge Sullivan sentenced Mr. Newman to 54 months in prison for trading in Dell and Nvidia that resulted in profits of about $4 million. In handing down the sentence, the judge pointed out that “this was a stark crossing of the line, engaging in criminal conduct, and that’s just wrong.†Mr. Newman’s situation looks similar to Mr. Steinberg’s and portends a sentence only a bit below that recommended by the sentencing guidelines.
For prosecutors, the case shows that they can win a conviction even when there is not overwhelming evidence showing a defendant knowingly acted on inside information. This is likely to further embolden the Justice Department in its pursuit of insider trading.
