New York-based hedge fund advisory firm Sigma Capital Management has agreed to pay nearly USD14m to settle the Securities and Exchange Commission (SEC) charges that the firm engaged in insider trading based on non-public information obtained through one of its analysts about the quarterly earnings of Dell and Nvidia Corporation.
The SEC’s case, borne out of its ongoing investigation into expert networks and the trading activities of hedge funds, began last year with charges against several hedge fund managers and analysts including Jon Horvath, a former analyst at Sigma Capital. Horvath agreed to a settlement earlier this month in which he admitted liability.
In a complaint filed today along with the proposed settlement in federal court in Manhattan, the SEC additionally charged Sigma Capital in the insider trading scheme and named two affiliated hedge funds – Sigma Capital Associates and SAC Select Fund – as relief defendants that unjustly benefited from Sigma Capital’s violations. SAC Select Fund is an affiliate of SAC Capital.
The SEC’s complaint alleges that Horvath provided Sigma Capital portfolio managers with nonpublic details about quarterly earnings at Dell and Nvidia after he learned them through a group of hedge fund analysts with whom he regularly communicated. Based on the confidential information, Sigma Capital traded Dell and Nvidia securities in advance of earnings announcements in 2008 and 2009 for USD6.425m in gains for its hedge fund affiliates.
Sigma Capital agreed to pay disgorgement of USD6.425m plus prejudgment interest of USD1,094,161.92 and a penalty of USD6.425m.
“Quarterly revenues and profit margins are fundamental drivers of stock prices. By illegally obtaining these vital financial measures in advance of their public announcement, Sigma Capital secured a crystal ball revealing where the stock would likely be trading in the near future,” says George S Canellos, acting director of the SEC’s division of enforcement. “However, the crystal ball failed to predict a costly settlement with the SEC.”
According to the SEC’s complaint, the key inside information that Horvath obtained about upcoming earnings announcements by Dell and Nvidia often differed significantly from the predictions of market analysts, who only had access to publicly available information. Based on this inside information, Sigma Capital traded Dell and Nvidia securities in advance of four quarterly earnings announcements and reaped more than USD5.2m for its hedge fund Sigma Capital Associates. Horvath’s inside information also enabled SAC Select Fund to execute trades and avoid losses of more than USD1m.
The SEC’s complaint charges Sigma Capital with violating Section 17(a) of the Securities Act, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Sigma Capital is neither admitting nor denying the charges. The settlement, subject to court approval, also would permanently enjoin Sigma Capital from future violations of the antifraud provisions of the federal securities laws.