NEW YORK (Reuters) - SAC Capital Advisors portfolio manager Michael Steinberg deliberately avoided telling his boss Steven A. Cohen that he was trading on Dell Inc with inside information, a former analyst at the hedge fund testified on Monday.
Jon Horvath, the U.S. government's star witness against Steinberg in the insider trading case, told a jury in Manhattan federal court that Steinberg had to reassure Cohen in November 2008 about his bets on Dell DELL.SN which were contrary to Cohen's own sense and the market wisdom at the time.
U.S. prosecutors showed the court a November 17 instant message conversation in which Steinberg told Horvath that Cohen had been "drilling" him for more details about a call he had made on Dell's stock.
Horvath said Steinberg, in describing his conversation with Cohen, emphasized to Horvath that he had left out the fact that the information came from a company insider.
"I said Jon has a number of industry contacts and that is what he has heard," Steinberg wrote.
"Mike was kind of my buffer," Horvath testified.
The November conversation with Cohen was the second time Horvath and Steinberg had addressed their Dell trading with Cohen.
In August 2008, three days before Dell announced its earnings, Cohen was betting the company's stock would go up, while Horvath's information was that the results would disappoint Wall Street.
Horvath said that, at Steinberg's direction, he emailed another analyst, whose advice Cohen was following, saying he had a second-hand read from someone at the company that the results would disappoint Wall Street.
After Dell's results were announced, Cohen congratulated Steinberg's team. "Nice job on dell," Cohen wrote in an email.
Horvath's testimony came at the start of the third week in the trial of Steinberg, the highest-level employee at SAC to face criminal charges over alleged insider trading.
SAC Capital agreed last month to plead guilty to fraud charges and pay $1.2 billion to resolve a long-running probe into insider trading at what had been a $14 billion hedge fund.
Steinberg, 41, has been charged with five counts of securities fraud and conspiracy to commit securities fraud on claims he used inside information to trade in Dell and Nvidia Corp (NVDA.O) in 2008 and 2009. He denies all wrongdoing.
The testimony by Horvath, 44, marked a rare instance in the trial in which Cohen's own trading and views on a stock were discussed.
Cohen has not been charged in the probe of his hedge fund, although the Securities and Exchange Commission has accused him in an administrative proceeding of failing to supervise Steinberg and another portfolio manager and prevent them from insider trading. He denies any wrongdoing.
Jurors were not told Monday what action Cohen took in response to the tip, and prosecutors have said in court filings they do not plan to introduce his actual trading records.
But in pre-trial motions, they said Cohen ultimately avoided $3.5 million in losses on Dell in August 2008 after Horvath's email warning was forwarded to Cohen.
The bet by Steinberg's own team meanwhile resulted in about $1 million in profits, the indictment said.
Horvath, who has pleaded guilty and was on his third day of testimony as a government witness, said that Cohen's original bullish position on Dell appeared to be based on a recommendation by Gabriel Plotkin, another SAC analyst.
While Plotkin normally covered retail companies, SAC had in July 2008 sent him, rather than Horvath, who covered technology companies, to an investor conference attended by Dell officials.
Based on Plotkin's recommendation, Cohen as a result was betting the Dell's stock would go up after its earnings were announced August 28, 2008, Horvath said. But Horvath said he had been tipped that the company's gross margins were below Wall Street expectations, setting the stage for the stock to drop.
Horvath said his tip, along with previous ones, had come from Jesse Tortora, an analyst at the time working for hedge fund Diamondback Capital Management.
Prosecutors have said Horvath and Tortora belonged to a "corrupt circle" of Wall Street analysts who swapped insider tips to give their hedge fund bosses for trading.
At SAC Capital, Horvath said employees were encouraged to pass along trading ideas to Cohen and could receive a piece of any profits he earned as a result.
"There was some kind of obligation to help Steve if you had conviction or good reason for the position," Horvath said.
After further email discussion, including about Tortora's data, Steinberg on August 26, 2008, said he had discussed Dell with Cohen, who asked to have Horvath and Plotkin "compare notes."
Horvath, who was in Mexico on vacation, that day emailed Plotkin about his second hand read that the information that Dell's gross margins would disappoint Wall Street. He added to "keep to yourself as obviously not well known."
"It wasn't out there," Horvath testified. "Investors weren't expecting this miss. And I didn't want it out there."
A similar surprise lay in store for Dell investors when the company reported earnings on November 20, 2008, but the bets Steinberg's team made based on Tortora's information were less successful, Horvath said Monday, because too many analysts at competing hedge funds had also received it and as a result the stock price was not moved by the surprise.
Referring to this disappointment, Steinberg emailed Horvath before the next quarterly Dell report in February 2009 warning him to tell Tortora not to share his Dell tips so widely.
"Tell your boy to KEEP QUIET," Steinberg wrote.
The case is U.S. v. Steinberg, U.S. District Court, Southern District of New York, No. 12-cr-00121.
Reporting by Nate Raymond in New York; Editing by Leslie Gevirtz and Richard Chang