It was still dark when U.S. federal agents entered an apartment building on Manhattan’s Park Avenue early Friday. They emerged with a senior trader at one of the world’s best-known hedge funds, restrained by handcuffs, and led him to a waiting vehicle.
The dramatic near-dawn arrest of Michael Steinberg marks an escalation of the long-running investigation into illegal insider trading at SAC Capital Advisors LP, a probe that is drawing nearer to the firm’s billionaire founder, Steven Cohen.
U.S. authorities accused Mr. Steinberg, 41, of securities fraud, alleging that he traded on confidential information about the earnings of two technology firms, Dell Inc. and Nvidia Corp.
Late last year, as the government’s probe intensified, SAC put Mr. Steinberg on leave from his job. He is one of at least nine current and former SAC employees linked to allegations of insider-trading activity.
Mr. Steinberg pleaded not guilty in a court appearance Friday, and was later released on a $3-million (U.S.) bond. “Michael Steinberg did absolutely nothing wrong,” his lawyer Barry Berke said in a statement provided to news organizations. His trading decisions were based on information that “he understood had been properly obtained.”
George Venizelos, a senior official at the FBI, claimed that Mr. Steinberg was “at the centre of an elite criminal club, where cheating and corruption were rewarded” and “research was nothing more than well-timed tips from an extensive network of well-sourced analysts.”
By charging Mr. Steinberg, U.S. authorities have taken aim at the upper echelon of Mr. Cohen’s firm, which manages approximately $15-billion. Mr. Steinberg is a 16-year veteran of the firm and has worked closely with Mr. Cohen.
The critical question remains the fate of Mr. Cohen, a man of vast wealth who has amassed a singular track record of successful returns – averaging about 30 per cent a year since SAC’s founding in 1992. Mr. Cohen, 56, has not been charged with any wrongdoing and has said that he has acted properly at all times.
“The government will run its case up the ladder as high as it can climb, until it can climb no further,” said Mark Zauderer, a commercial and securities lawyer at Flemming Zulack Williamson Zauderer in New York.
Earlier this month, in a move that SAC portrayed as putting its legal troubles behind it, the firm agreed to pay over $600-million to securities regulators to resolve civil charges of insider trading by its employees. It was the largest settlement ever paid related to insider trading, according to the U.S. Securities and Exchange Commission.
Shortly after news of the settlement, Mr. Cohen – an avid art collector – purchased a painting by Pablo Picasso, Le Rêve, for $155-million. Last week, he reportedly bought a $60-million oceanfront home in Long Island. His net worth is an estimated $9.3-billion.
The story appears far from over. On Thursday, a federal judge said he needed more time to decide whether or not to approve the settlement between SAC and securities regulators. Of particular concern: the fact that the firm was permitted to settle the charges without admitting any wrongdoing.
“There is something counter-intuitive and incongruous about settling for $600-million if it truly did nothing wrong,” said the federal judge, Victor Marrero, according to The New York Times.
The settlement also doesn’t rule out the possibility of future criminal charges against Mr. Cohen. Experts believe that U.S. authorities will try to persuade Mr. Steinberg to testify against Mr. Cohen, just as they did with Mathew Martoma, a former SAC employee also facing criminal charges.
In Mr. Martoma’s case, the government alleges that he parlayed confidential information about a drug trial into $276-million worth of illegal profits and avoided losses. They also claim Mr. Martoma discussed those trades with Mr. Cohen. Mr. Martoma has denied the accusations.
The charges revealed on Friday against Mr. Steinberg accuse him of conspiring to trade on confidential information from late 2007 until some time in 2009. It relies on the co-operation of Jon Horvath, a former SAC analyst who pleaded guilty last year to insider trading charges.
Mr. Steinberg is “another Wall Street insider who fed off a corrupt grapevine of proprietary and confidential information,” said Preet Bharara, the top federal prosecutor in Manhattan, in a statement. “Where once Mr. Steinberg answered only to his own rules, now he will have to answer to the rule of law.”
In August, 2008, according to court documents, Mr. Horvath sent an e-mail to Mr. Steinberg about Dell. A “secondhand read from someone at the company” indicated that its profit would not meet market expectations in an imminent earnings release, Mr. Horvath wrote. “Please keep to yourself as obviously not well known.”
Three minutes later, Mr. Steinberg responded in his own e-mail. “Yes normally we would never divulge data like this, so please be discreet. Thanks,” he wrote.
Mr. Steinberg accumulated a significant bet against Dell’s shares on the basis of inside information, prosecutors allege, which paid off in illegal profits of $1-million after the company’s earnings disappointed investors. The stock plunged 13 per cent the day after the earnings announcement in late August, 2008.
“Mike has conducted himself professionally and ethically during his long tenure at the firm,” a spokesman for SAC said in an e-mailed statement. “We believe him to be a man of integrity.”