November 27, 2013 / 12:50 AM / 5 years ago

SAC's Steinberg wanted 'edgy' information, ex-analyst says

NEW YORK (Reuters) - A former analyst testified on Wednesday that SAC Capital Advisors portfolio manager Michael Steinberg pushed him to obtain “edgy” information about technology companies after he had made money-losing recommendations.

Michael Steinberg (R) arrives at the Manhattan Federal Courthouse in New York, November 19, 2013. REUTERS/Brendan McDermid

Jon Horvath, the former analyst, gave the account in federal court in New York, where he is testifying against Steinberg, the first employee of Steven A. Cohen’s SAC Capital to face trial in a government’s investigation of insider trading on Wall Street.

Horvath, who has pleaded guilty and is cooperating with prosecutors, told jurors that after a bad bet in 2007 Steinberg encouraged him to cultivate sources with information on public companies. Horvath said he thought Steinberg meant non-public information.

“What I need you to do is get edgy, proprietary, market-moving information so we can use it to make money on these stocks,” Horvath said Steinberg told him.

Steinberg is the first SAC employee charged in the government’s long-running insider trading investigation to face trial. SAC earlier this month pleaded guilty to fraud charges and agreed to pay $1.2 billion.

Steinberg, 41, faces five counts of securities fraud and conspiracy to commit securities fraud on allegations he used inside information to trade shares of Dell Inc and Nvidia Corp in 2008 and 2009, resulting in $1.4 million in profits. He denies wrongdoing.

Prosecutors have said Steinberg obtained his information from a “corrupt circle” of Wall Street analysts who swapped tips and fed them to their hedge fund bosses for trading purposes.

Those analysts included Horvath, 44, who prosecutors said was the key link between the group and Steinberg.

On Tuesday, Horvath said he is cooperating with prosecutors in hopes of avoiding jail time. He faces a maximum 45 years in prison.

Returning to the stand on Wednesday, Horvath, who joined SAC’s Sigma Capital Management division in 2006, said Steinberg’s push for him to leverage sources came after a rocky 2007.

Sigma had made $7 million to $10 million in profits in the first half of the year on Horvath’s recommendations, he said. But from there on, Horvath said he lost money, ending the year up just $4 million to $5 million.

After Sigma took a $2 million loss on a trade in what is today called NetApp Inc, Horvath said, a tense and upset Steinberg pulled him aside to stress his need to get “edgy” information.

“I thought my job was in danger,” Horvath said.

On his self-evaluation, Horvath, who had aimed for his recommendations to result in $10 million in profits in 2007, said he performed “poorly” against his annual goals. “Utilizing my network more” was one goal that Horvath listed for himself for 2008.

Starting in late 2007, Horvath said he began getting “high-level” tips about Dell’s revenue, gross margins and operating expenses from Jesse Tortora, an analyst at the time working for hedge fund Diamondback Capital Management.

Horvath said he met Tortora through his roommate in San Francisco, Fayad Abbasi. Tortora and Abbasi worked at Prudential Financial before it closed its equity research unit in 2007.

Abbasi went on to join Neuberger Berman, where he hired Sandeep Goyal. Prosecutors say Goyal became Tortora’s source on Dell, passing along information he in turn got from Rob Ray, a Dell investor relations employee.

Neither Abbasi nor Ray was charged. Goyal pleaded guilty to conspiracy to commit securities fraud and securities fraud in 2011.

In his testimony, Horvath said not all the trades based on Tortora’s tips worked out, with an early one resulting in a $1 million loss.

But he said he came to have more confidence in Tortora’s information, which also improved over time. Horvath said he would pass details to Steinberg “for purposes of trading on the information.”

A bet ahead of Dell’s May 2008 earnings announcement resulted in the hedge fund’s netting about $300,000, Horvath said. In the following quarter, a bet that Dell would miss Wall Street expectations paid off by about $1 million, he said.

During this time, Horvath said he suspected other big institutional investors were also getting information from Dell, which in an internal SAC documents he called “leaky.”

Many hedge funds hired so-called expert network firms that would pair investors with industry experts, some of whom worked at companies including Dell, he said.

At one point, Horvath asked Steinberg if SAC could hire a prominent expert networking firm called Gerson Lehrman Group, which Horvath said he knew employed Dell people from his time at Lehman Brothers Holdings Inc.

Steinberg relayed the request, he said. But SAC turned it down due to a policy prohibiting the use of such consulting firms if they employed people working at publicly traded companies, Horvath said.

In any event, Steinberg didn’t consider the information someone could get from expert networking firms useful since so many other hedge funds were hiring them, Horvath said.

“He didn’t think the information was that valuable,” he added.

Nevertheless, Horvath did receive information gathered from expert networking firms, according to testimony last week by Tortora, who said he talked to “dozens of experts” per week and then shared the results with the rest of the circle of friends, including Horvath.

Horvath is expected to continue testifying on Monday.

The case is U.S. v. Steinberg, U.S. District Court, Southern District of New York, No. 12-cr-00121.

Reporting by Nate Raymond; Additional reporting by Emily Flitter; Editing by Steve Orlofsky

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