Law books and gavel

SEC charges Sigma Capital portfolio manager with insider trading

Tue, 02/04/2013 - 12:02

The Securities and Exchange Commission has charged Michael Steinberg, a portfolio manager at New York-based hedge fund advisory firm Sigma Capital Management, with trading on inside information ahead of quarterly earnings announcements by Dell and Nvidia Corporation.

 
The SEC alleges that Steinberg's illegal conduct enabled hedge funds managed by Sigma Capital and its affiliate SAC Capital Advisors to generate more than USD6m in profits and avoided losses.
 
Steinberg received illegal tips from Jon Horvath, an analyst who reported to him at Sigma Capital. Horvath was charged last year among several hedge fund managers and analysts as part of the SEC's broader investigation into expert networks and the trading activities of hedge funds. Earlier this month, Sigma Capital and two affiliated hedge funds agreed to a USD14m settlement with the SEC for insider trading charges.
 
"Steinberg essentially got an advance copy of Dell and Nvidia's quarterly earnings announcements, allowing him to trade on tomorrow's news today," says George S Canellos, acting director of the SEC's division of enforcement.
 
In a separate action, the US Attorney's Office for the Southern District of New York has announced criminal charges against Steinberg.
 
According to the SEC's complaint filed in federal court in Manhattan, Steinberg traded Dell and Nvidia securities based on non-public information in advance of at least four quarterly earnings announcements in 2008 and 2009. Horvath provided Steinberg with non-public details that he had obtained through a group of hedge fund analysts with whom he regularly communicated. Steinberg used the inside information to obtain more than USD3m in profits and losses avoided for a Sigma Capital hedge fund.
 
The SEC's complaint further alleges that Steinberg also illegally tipped inside information about Dell's quarterly earnings to another portfolio manager at Sigma Capital. Horvath sent an e-mail to the other portfolio manager and copied Steinberg on the message.
 
The e-mail stated: "I have a 2nd hand read from someone at the company - this is 3rd quarter I have gotten this read from them and it has been very good in the last quarters. They are seeing GMs miss by 50-80 [basis points] due to poor mix, [operating expenses] in-line and a little revenue upside netting out to an [earnings per share] miss. . . . Please keep to yourself as obviously not well known."
 
The SEC alleges that two minutes later, Steinberg chimed in: "Yes, normally we would never divulge data like this, so please be discreet." Only 24 minutes after Horvath's e-mail, the other portfolio manager began to sell shares of Dell stock on behalf of the Sigma Capital hedge fund and reduced the hedge fund's Dell holdings by 600,000 shares ahead of Dell's quarterly earnings announcement. In the days following the negative announcement, Steinberg closed out a short position in Dell stock and multiple options positions for a USD1m illicit profit to the Sigma Capital hedge fund. The other portfolio manager's sales of Dell stock enabled the Sigma Capital hedge fund and a hedge fund managed by SAC Capital Advisors to avoid more than USD3m in losses.
 
The SEC's complaint charges Steinberg with violating Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a final judgment ordering Steinberg to pay disgorgement of his ill-gotten gains plus prejudgment interest and financial penalties, and permanently enjoining him from future violations of these provisions of the federal securities laws.


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