c.2013 New York Times News Service
c.2013 New York Times News Service
NEW YORK — Jon Horvath needed to step up his game at SAC Capital Advisors.
Horvath, who gathered information about technology companies in which SAC invested, conceded in a self-performance review in 2007 that he offered a “poor contribution to” profit at the giant hedge fund. Horvath had also lost “a lot of money” from a bet on a data storage company, an episode that prompted a stern warning from his boss, Michael S. Steinberg.
Horvath’s attempts to rectify the mistake are now at the center of Steinberg’s insider trading trial. Horvath, the U.S. government’s star witness in the case who is hoping for leniency in exchange for testifying, claimed on Wednesday that Steinberg wanted him to cross a legal line.
“What I need you to do is get me edgy, proprietary information,” Horvath recalled Steinberg instructing him one evening after SAC’s trading floor went dark for the day. In testimony Wednesday, his second day on the witness stand, Horvath added that “I thought he wanted me to cultivate sources of nonpublic information,” that is, violate insider trading laws.
Horvath moved swiftly to appease his boss, extracting confidential information from a friend about Dell’s financial results and broader corporate strategy. Steinberg then traded on the information, Horvath said, activity that underpins the government’s case.
“I thought my job was in danger,” Horvath said, portraying Steinberg as something of a bully. “I thought he’d fire me.”
Steinberg’s trial is unfolding in U.S. District Court in Manhattan just weeks after SAC, run by the billionaire investor Steven A. Cohen, pleaded guilty to criminal insider trading charges. SAC agreed to pay $1.2 billion to the government, a record for insider trading, and wind down its business of managing outside money for investors. Cohen has not been charged criminally.
Steinberg, a 41-year-old senior trader who was among SAC’s earliest employees, is the first SAC employee to stand trial in the government’s long investigation of the hedge fund. Of the eight SAC employees charged criminally, six have pleaded guilty to securities fraud, including Horvath. One other employee, Mathew Martoma, is fighting the charges and faces a trial in January.
A 44-year-old native Swede who grew up in Canada, Horvath is the linchpin in the case against Steinberg. Although Horvath is older, Steinberg was the leader. They worked side by side on SAC’s trading floor; Horvath served as a sort of research assistant with a unique window into Steinberg’s trading.
But to Steinberg’s lawyer, Barry H. Berke, Horvath’s viewpoint is tainted.
He is “recreating history” in a desperate attempt to strike a deal with the government, Berke said in opening arguments. Horvath acknowledged on the witness stand that “I hope to avoid jail time.”
It is unclear whether Horvath will hold up under Berke’s cross-examination, scheduled for next week. Already, some of Horvath’s testimony appeared stiff, as if he rehearsed the answers.
Berke is expected to press Horvath about the details of the leak from Dell, a strategy that will suggest that Steinberg had no idea that SAC obtained the information improperly. Berke will most likely highlight that Steinberg is at the end of a five-person chain of information that started with an insider at Dell and wound its way to Horvath and Steinberg.
Jesse Tortora, who was friends with Horvath, was in the middle of the chain. A former employee at Intel who later became a technology stock analyst at another hedge fund, Diamondback Capital Management, Tortora accumulated a Rolodex that reached inside Dell.
The contacts paid off for Horvath. From late 2007 through 2009, Horvath said in testimony, Tortora provided a rich vein of information about Dell’s financial data.
Tortora, who has also pleaded guilty to insider trading and testified earlier in Steinberg’s trial, provided as many as five updates before Dell’s August 2008 earnings report. Tortora, based on his source with ties to the company, believed that Dell was going to produce disappointing results that quarter.
Armed with that tip, Horvath alerted Steinberg, who then authorized a bet against Dell’s stock. Steinberg’s portfolio earned about $1 million on that trade.
That same year, Tortora informed Horvath that Dell’s chief financial officer was set to step down. And when Dell was planning a major cost-cutting venture, Tortora once again alerted Horvath.
Most times, Horvath would log the tips into an SAC database. When the information was particularly pertinent, like the cost-saving effort, Horvath would email it directly to Steinberg.
“I like the Dell chart,” Steinberg replied, indicating SAC should double down on the stock.
While the emails could be damning, it is possible that Steinberg was unaware that the information had been improperly obtained. The Dell source, theoretically, could have had authorization to release the information.
“I told Mike that Jesse had a contact at Dell, inside the company,” Horvath said. But he did not remember whether the conversation happened over the phone or in person. And SAC never knew the insider’s name.