Manhattan U.S. Attorney and FBI Assistant Director in Charge Announce Insider Trading Charges Against Hedge Fund Portfolio Manager
Michael Steinberg Allegedly Earned $1.4 Million in Illegal Profits
|U.S. Attorney’s Office March 29, 2013|
Preet Bharara, the United States Attorney for the Southern District of New York, and George Venizelos, the Assistant Director in Charge of the New York Field Office of the Federal Bureau of Investigation (FBI), today announced conspiracy and securities fraud charges against Michael Steinberg, a portfolio manager at a hedge fund located in New York, New York (“Hedge Fund A”), for his alleged involvement in an insider trading scheme. As alleged, Steinberg executed trades based on material, non-public information (“inside information”) provided to him by a Hedge Fund A analyst who worked for him—John Horvath, who previously pled guilty to securities fraud charges pursuant to a cooperation agreement. In particular, Steinberg is alleged to have traded in two publicly traded technology companies, Dell Inc. (“Dell”) and NVIDIA Corporation (“NVIDIA”), based on inside information that Horvath obtained from a circle of research analysts at several different investment firms, all of whom have also pled guilty for their roles in the scheme. Those individuals are: Jesse Tortora, a former research analyst at Diamondback; Spyridon “Sam” Adondakis, a former research analyst at Level Global; Danny Kuo, a former research analyst and fund manager at Whittier Trust Company; and Sandeep “Sandy” Goyal, a former research analyst who worked at the Manhattan office of Neuberger Berman. Steinberg’s trading in Dell and NVIDIA earned Hedge Fund A $1.4 million in illegal profits. Steinberg was arrested this morning in Manhattan and will be presented and arraigned in Manhattan federal court before U.S. District Judge Richard J. Sullivan at 11:00 a.m.
Manhattan U.S. Attorney Preet Bharara said, “As alleged, Michael Steinberg was another Wall Street insider who fed off a corrupt grapevine of proprietary and confidential information cultivated by other professionals who made their own rules to make money. With lightning speed in at least one case, Mr. Steinberg seized on the opportunity to cash in and tried to keep his crime quiet, as charged in the Indictment. As alleged, where once Mr. Steinberg answered only to his own rules, now he will have to answer to the rule of law, like so many others before him.”
FBI Assistant Director in Charge George Venizelos said, “Mr. Steinberg’s arrest is the latest in the FBI’s campaign to root out insider trading at hedge funds and expert networking firms, resulting in more than 70 arrests so far. As alleged, Mr. Steinberg was at the center of an elite criminal club, where cheating and corruption were rewarded. Research was nothing more than well-timed tips from an extensive network of well-sourced analysts. The law is clear for everyone, including Mr. Steinberg. Trading on inside information is illegal. The FBI will continue to police our markets and arrest anyone who violates the law.”
In a separate action, the U.S. Securities and Exchange Commission announced civil charges against Steinberg.
According to the allegations in the superseding indictment, other court documents, and evidence adduced at a related trial:
A group of analysts at different hedge funds, including Tortora, Adondakis, Horvath, and Kuo, obtained inside information directly or indirectly from employees who worked at certain public companies and then shared the information with each other and with the hedge fund portfolio managers for whom they worked, including Steinberg. In particular, Tortora provided Horvath and others with inside information related to Dell’s quarterly earnings (the “Dell inside information”), which Tortora obtained from Goyal who, in turn, had obtained the Information from an employee at Dell (the “Dell insider”). For Dell’s quarter ending August 1, 2008, the results for which were publicly announced by Dell on August 28, 2008 (the “Dell Announcement”), the Dell inside information indicated that Dell would report gross margins that were materially lower than market expectations. In advance of the Dell Announcement, Horvath reported this negative inside information to Steinberg.
On August 18, 2008, after a series of calls from the Dell Insider to Goyal and from Goyal to Tortora and Horvath, Horvath then called Steinberg. Within a minute of the telephone call between Steinberg and Horvath, Steinberg’s portfolio began shorting shares of Dell. One minute later, Horvath wrote an e-mail to Steinberg stating: “Pls keep the DELL stuff especially on the down low...just mentioning that because JT [Jesse Tortora] asked me specifically to be extra sensitive with the info.” By the end of the day on August 18, 2008, Steinberg had accumulated a net short position of over 167,000 shares of Dell. On August 26, 2008, Horvath confirmed in an e-mail to Steinberg and another portfolio manager at Hedge Fund A that Horvath’s Dell information had been based on a “2nd hand read from someone at the company.” Steinberg responded, “Yes normally we would never divulge data like this, so please be discreet.” And on August 27, 2008, Steinberg sent an e-mail to Horvath with the subject line, “Dell action,” in which he asked, “Have u double checked [with] JT this week?” Horvath responded, “Yes he [Tortora] checked in [a] couple days ago, same read no change.”
On August 28, 2008, before Dell’s Announcement, Steinberg executed or caused to be executed additional short trades. Steinberg also executed or caused to be executed options trades in Dell in advance of the Dell Announcement.
After the close of the market on August 28, 2008, Dell publicly announced gross margins that were substantially below market expectations. At the end of the next trading day following Dell’s Announcement, its stock price dropped by more than 13 percent. Shortly thereafter, Steinberg covered his short position and closed out his position in Dell option contracts, resulting in an illegal profit for Hedge Fund A of approximately $1 million.
In addition, in 2009, Kuo obtained inside information regarding NVIDIA’s financial results (the “NVIDIA inside information”) in advance of NVIDIA’s quarterly earnings announcements. The NVIDIA inside information indicated, among other things, that NVIDIA’s gross margins would be lower than market expectations. Kuo obtained the NVIDIA inside information from a friend, Hyung Lim (“Lim”), who received it from an employee at NVIDIA (the “NVIDIA insider”). In advance of NVIDIA’s May 7, 2009 quarterly earnings announcement (the “NVIDIA announcement”), Kuo provided the NVIDIA inside information, which he had obtained from Lim, to Tortora, Horvath, and others. Horvath, in turn, provided the NVIDIA inside information to Steinberg, who executed or caused to be executed transactions in NVIDIA in advance of the NVIDIA Announcement.
On May 7, 2009, NVIDIA publicly announced gross margins that were substantially lower than the market expected. At the end of the trading day following the NVIDIA announcement, NVIDIA’s stock price dropped by more than 13 percent. Shortly thereafter, Steinberg caused Hedge Fund A to liquidate its position in NVIDIA, resulting in an illegal profit for Hedge Fund A of over $400,000.
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Steinberg, 41, of New York, New York, is charged with one count of conspiracy to commit securities fraud and four counts of securities fraud. The conspiracy count carries a maximum sentence of five years in prison and a fine of the greater of $250,000 or twice the gross gain or loss from the offense. Each of the securities fraud counts carries a maximum sentence of 20 years in prison and a fine of $5 million or twice the gross gain or loss from the offense.
The allegations in the indictment against Steinberg are merely accusations, and he is presumed innocent unless and until proven guilty.
Horvath, 43, and Kuo, 37, each pled guilty to one count of conspiracy to commit securities fraud and two substantive counts of securities fraud in September 2012 and April 2012, respectively.
Tortora, 35, Adondakis, 41, and Goyal, 40, each pled guilty to one count of conspiracy to commit securities fraud and one substantive count of securities fraud in May 2011, April 2011, and June 2011, respectively.
Mr. Bharara praised the investigative work of the FBI. He also thanked SEC. Mr. Bharara noted that the investigation is continuing.
This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which Mr. Bharara serves as a Co-Chair of the Securities and Commodities Fraud Working Group. The task force was established to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, it is the broadest coalition of law enforcement, investigatory, and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state, and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions and other organizations. Over the past three fiscal years, the Justice Department has filed nearly 10,000 financial fraud cases against nearly 15,000 defendants including more than 2,900 mortgage fraud defendants. For more information on the task force, please visit www.stopfraud.gov.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Antonia M. Apps and John T. Zach are in charge of the prosecution.