Former SAC Capital Advisors LP hedge fund manager Michael Steinberg was sentenced to 3 1/2 years in prison for insider trading, capping one of the biggest victories for prosecutors who spent seven years investigating the firm and its boss, Steven A. Cohen.
Steinberg, 42, who handled technology, media and telecommunications stocks at SAC Capital’s Sigma Capital Management unit, was the longest-serving employee at the hedge fund convicted in the U.S. probe. He was found guilty in December of an insider scheme involving tech stocks that garnered more than $1.8 million in illegal profits.
“For most people on the planet, $1.8 million of gain is a lifetime of accumulated wealth,” U.S. District Judge Richard Sullivan said before sentencing Steinberg today in Manhattan federal court. “Maybe in a hedge fund it’s no big deal, but it’s a lot of money to most people.”
In giving Steinberg three years less than the maximum sought by the government, the judge said the fund manager is “basically a good man.” He cited almost 70 letters of support, including those sent by Steinberg’s wife and father.
Prosecutors have won convictions against eight managers and analysts in their investigation of SAC Capital, amid a broader crackdown on market cheating at hedge funds, publicly traded companies and so-called expert-networking firms. SAC Capital last year reached a $1.8 billion settlement with the U.S., pleading guilty to making hundreds of millions of dollars in illegal profits and fostering a culture of criminality.
$2 Million Fine
Steinberg was also fined $2 million and ordered to forfeit $365,000 as part of his sentencing. The criminal probe of his hedge fund never reached Cohen, who hasn’t been charged with any wrongdoing. Stamford, Connecticut-based SAC, however, ceased being a money manager for outside investors as part of the guilty plea, and has since shed its name -- the initials of its billionaire founder. In April, SAC Capital changed its name to Point72 Asset Management LP.
Mathew Martoma, a former fund manager for SAC’s CR Intrinsic Investors unit, is to be sentenced next month in what the government called the biggest insider trading scheme in U.S. history, at least by dollar value. He was convicted in February after prosecutors alleged he helped SAC Capital make $276 million on illegal tips about an Alzheimer’s drug by trading in Elan Corp. and Wyeth LLC.
Barry Berke, Steinberg’s lawyer, sought a prison term of just two years, citing his client’s charitable works, and arguing he was less blameworthy than others convicted in the scheme. He reiterated those arguments today at Steinberg’s sentencing.
Prosecutors argued for a term of 5 1/4 years to 6 1/2 years, saying his role was much broader than Berke said. They succeeded in having some of Cohen’s trades counted by the judge in his calculation of Steinberg’s sentence.
Sullivan, who has imposed some of the longest sentences on insider traders, said he was imposing a lesser term because Steinberg hadn’t paid bribes for his tips unlike other defendants in insider-trading cases he’s presided over.
In 2011, Sullivan gave more than 10 years to Zvi Goffer, a former Galleon Group LLC trader convicted of leading a scheme in which prosecutors said he made more than $10 million.
The judge also presided over a trial against two hedge fund managers involving the same illegal tips Steinberg used to make trades. In that case, Sullivan ordered Level Global Investors LP co-founder Anthony Chiasson, who was found guilty of using inside information to make more than $68 million, to serve 6 1/2 years in prison. His co-defendant, former Diamondback Capital Management LLC manager Todd Newman, got 4 1/2 years. Newman made about $3.8 million in illicit profits.
Berke argued that Steinberg, who worked at SAC Capital from 1996 until his conviction, was less culpable than either Newman or Chiasson. Steinberg was a “fourth-level tippee” who was at the end of a chain of analysts obtaining nonpublic information, Berke said.
The judge agreed with Berke and cited letters sent in support of Steinberg as the motivation for his leniency.
“I do think that the life you’ve led says something distinguishable from others I’ve sentenced for similar crimes,” Sullivan said. Among the letters were statements on Steinberg’s work to start a philanthropic group that gives money to provide clean water and medicine in Africa.
The judge said he would recommend that Steinberg serve his term at the satellite federal prison camp in Otisville, New York, about 80 miles (130 kilometers) northwest of Steinberg’s home in Manhattan. Sullivan also agreed to let Steinberg remain free during his appeal.
Steinberg, who had fainted before the jury announced the verdict in December, showed little emotion today. After the hearing, Steinberg, standing in court in a dark blue suit, was encircled by supporters and family members who hugged and kissed him. He and his lawyer declined to comment.
The jury in Steinberg’s trial deliberated for little more than a day before finding him guilty of using tips from his analyst on Dell Inc. and Nvidia Corp. (NVDA:US) in 2008 and 2009.
Prosecutors said Steinberg traded on illegal tips after Jon Horvath, his former analyst, provided the fund manager with numbers on revenue, gross margins and operating expenses ahead of company earnings announcements.
“Michael Steinberg traded on information from company insiders at Dell and Nvidia to reap nearly $2 million in illegal profits,” Manhattan U.S. Attorney Preet Bharara said in a statement today. “He has learned the steep cost of those transactions.”
Horvath, who pleaded guilty and testified at the trial, said Steinberg directed him to obtain “edgy, proprietary, market-moving information.”
The prosecutors argued that e-mails and instant messages proved Horvath constantly updated Steinberg with secret Dell data, showing that the computer-maker was going to miss Wall Street estimates when it announced its quarterly earnings on Aug. 28, 2008.
The U.S. said SAC Capital e-mails, as well as trading and research data, showed the fund manager was aware the information he received from Horvath wasn’t public.
Two days before Dell was set to report second-quarter 2008 earnings, Horvath e-mailed Steinberg and another portfolio manager to warn that the computer maker would miss earnings estimates.
“I have a 2nd hand read from someone at the company,” Horvath said in the Aug. 26 e-mail, which provided details on company financial information. “Please keep to yourself as obviously not well known.”
Steinberg replied, “Yes normally we would never divulge data like this, so please be discreet. Thanks.”
Horvath was one of seven analysts and portfolio managers charged in January 2012 and accused of trafficking in confidential information from 2007 to 2009.
Five of those charged have pleaded guilty and agreed to cooperate with the U.S.
The case is U.S. v. Steinberg, U.S. District Court, Southern District of New York (Manhattan).
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