SAC Capital's Steinberg faces insider trading trial

By Nate Raymond

NEW YORK Mon Nov 18, 2013 1:08am EST

Michael Steinberg leaves Manhattan Federal Court in New York March 29, 2013.

Credit: Reuters/Keith Bedford

NEW YORK (Reuters) - A trial starting this week will provide a window into what prosecutors have called a decade-long insider trading scheme at Steven A. Cohen's once-powerful SAC Capital Advisors hedge fund.

Michael Steinberg, a top portfolio manager at SAC, faces charges he illegally traded in technology stocks. His trial, set to start on Tuesday, comes just two weeks after Cohen's firm agreed to pay a record $1.2 billion to settle insider trading charges.

Steinberg, who is on leave from SAC, became the highest-level employee at Cohen's firm to face criminal charges after he was arrested at his home on New York's Park Avenue on Good Friday this year.

A verdict for prosecutors in New York would continue their winning streak at trial in a broad crackdown on insider trading on Wall Street. Since the first charges were announced in October 2009, 76 people have been convicted.

Barry Berke, Steinberg's lawyer, declined to comment on the case, but in the past has said his client did "absolutely nothing wrong" and his "trading decisions were based on detailed analysis."

While several SAC employees have been charged, most have pleaded guilty. Steinberg is the first to fight his case before a jury. Another SAC manager, Mathew Martoma, is set to follow to trial in January.

Both cases are expected to highlight not just the conduct of the individual traders but also the extent SAC Capital's culture and compliance failures encouraged insider trading.

SAC, once a $14 billion hedge fund, agreed November 4 to cease acting as an investment adviser as part of a plea deal. A federal judge is weighing whether to accept SAC's subsequent guilty plea to fraud charges.

"CIRCLE OF FRIENDS"

In the trial of Steinberg, 41, the prosecution's case is expected to turn in part on the testimony of a star witness, Jon Horvath, who has been cooperating with prosecutors since pleading guilty in September 2012, on the eve of his own trial.

Prosecutors have said Horvath, an SAC analyst, was part of a "corrupt circle of friends" who swapped inside information for the benefit of their hedge fund employers.

The case focuses on trades involving the stocks of Dell Inc and Nvidia Corp in late 2007 through 2009 at Sigma Capital Management, an SAC hedge fund focused on technology stocks that Steinberg oversaw.

In the case of Dell, prosecutors say that in 2008 and 2009, Horvath received non-public information in advance of Dell's quarterly earnings announcements from Jesse Tortora, an analyst at Diamondback Capital Management.

Tortora, in turn, got his information from another analyst, Sandeep Goyal at Neuberger Berman, prosecutors say. Goyal got his information from Rob Ray, an employee in the investor relations department at Dell, where he previously worked, according to the charges and testimony in a previous trial.

Among the trades outlined by prosecutors is one made in advance of Dell's earnings report on August 28, 2008.

After receiving a tip, Tortora talked on the phone with Horvath on August 18. Four minutes after that call ended, Horvath called Steinberg. A minute after that call ended, Sigma began shorting Dell shares.

In an email to Steinberg after the call, Horvath asked to "keep the DELL stuff especially on the down low" and said Tortora "asked me specifically to be extra sensitive with the info," according to the indictment.

The bet, along with a further short sale on Dell's stock made on August 28, allowed Sigma to earn about $1 million, the indictment said.

Both Tortora and Goyal pleaded guilty to conspiracy to commit securities fraud and securities fraud charges in 2011 and are cooperating with the investigation. Ray was not charged.

Tortora is expected to be the second witness called at Steinberg's trial, prosecutor Antonia Apps said at a hearing Thursday.

NVIDIA TRADES

The Nvidia trades also resulted from information that passed through many hands before reaching Steinberg, prosecutors have said.

It started with Chris Choi, who worked in Nvidia's finance unit, who gave details about the company's financial results to Hyung Lim, a family and church friend, according to court records and testimony in the earlier trial.

Lim then circulated details on to Danny Kuo, a manager at Whittier Trust Co, who in turn provided the information to Horvath, prosecutors say. Horvath then told Steinberg, the indictment said.

The information provided insight into the fact that Nvidia's gross margins were lower than expected. Prosecutors say that as a result of the tip, Steinberg sold off Sigma's entire Nvidia position, earning over $400,000.

Lim and Kuo pleaded guilty to insider trading charges in 2012. Choi was not charged.

Prosecutors have said they also intend to introduce evidence of other trades Steinberg made in Dell and Nvidia in 2008 and 2009.

They have received a judge's permission to demonstrate how Steinberg's trading patterns mirrored those of other hedge fund managers who similarly received Dell and Nvidia tips from Horvath's circle of analysts.

Among those managers were Todd Newman, a former portfolio manager at Diamondback Capital Management, and Anthony Chiasson, a co-founder of Level Global Investors.

Trades in Dell and Nvidia figured in their trial, and a jury convicted them in December 2012. Newman was sentenced to 4-1/2 years in prison and Chiasson to 6-1/2 years. They are out on bail pending appeal.

Jury selection in Steinberg's trial is set for Tuesday. Trial before U.S. District Judge Richard Sullivan, the same judge who oversaw the trials of Newman and Chiasson, is expected to last up to four weeks.

The case is USA v. Steinberg, U.S. District Court, Southern District of New York, No. 12-cr-00121.

(Reporting by Nate Raymond; Editing by Leslie Adler)

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Mediation can bring justice with no need for a trial

When a health-care provider harms instead of heals, patients who seek answers and redress generally face the prospect of a long and costly lawsuit. But there's another option, one that can significantly reduce the toll of a court battle while providing many of the same benefits to patients and their families: mediation.

As politicians discuss tort reform and caps on damage awards, fans of mediation tout its potential to save patients, doctors and hospitals time and money and avoid the courtroom altogether.

In mediation, both parties sit down with a trained professional, sometimes a lawyer or a former judge, to discuss what went wrong and seek to work out a settlement. During a session that may last for several hours, lawyers for the opposing parties do the negotiating. But patients or their family members, health-care providers and insurance representatives may take part as well.

A handful of states, including Maryland, as well as the District, require opposing parties in medical malpractice cases to try mediation before going to court.

In states that don't require mediation, it is fairly uncommon, though lawyers for either side may suggest it to their clients as an alternative to a drawn-out legal battle.

Whatever is said in mediation is confidential and cannot be used in court. "It's a setting that lets people talk to each other without worrying that what they say may come back to bite them in litigation," says Carol Liebman, a clinical professor of law at Columbia University who co-authored a recent study in the Journal of Health Politics, Policy and Law examining the potential for mediation to improve patient safety.

Agreeing to try mediation doesn't mean that opposing parties can't decide to litigate instead. In practice, however, about 95 percent of cases that go to mediation settle there, estimates Jerry Roscoe, a former medical malpractice litigator who now works as a mediator for JAMS, a large private provider of dispute resolution mediators based in Irvine, Calif. "Families have already been through so much," he says. "Neither side wants to put them through a literal and figurative trial."

When Nikki Clark's mother went to the emergency room near her home in New York about seven years ago because she was having trouble breathing, ER staff diagnosed tonsillitis and admitted her overnight for observation. At 4 a.m. the next day, Clark, then 21, got a call from the hospital telling her that her mother, 41 and otherwise healthy, had died.

An autopsy later showed she'd been given an overdose of a painkiller. No one had checked on her during the night, and by the time a staff member looked in, she was dead. She left behind not only Nikki but two other children, then ages 2 and 3.

Clark filed a wrongful-death suit. Her lawyer suggested she consider mediation, something she'd never heard of. She's glad she did. In a meeting with hospital representatives and lawyers for both sides, Clark says, she got the answers she needed about her mother's death and an apology from the lawyer for the hospital. That helped give her some peace, she says, and besides: "I don't think I could have made it through a trial."

Achieving emotional closure may be easier in mediation than in an adversarial court setting, say advocates. Improving the quality of care is another potential upside. If clinical staff members who were involved in the problematic care are present at the session, they could discuss systemic factors that contributed to the issue, "and that could lead to systemic changes to prevent it happening again," says Chris Stern Hyman, a lawyer and mediator who is one of the co-authors of Liebman's study.

In the end, though, mediation is about money. In Clark's case, the process led to a financial settlement much more quickly than the five years a New York mediator estimated that it can take for a medical malpractice case to be resolved in that state in court. Clark received $1.7 million, with 30 percent going for her lawyer's fee.

Although precise figures are unavailable, plaintiffs may well receive somewhat smaller awards in mediation than they would if the case went to trial, says Jim Leventhal, a senior partner with the Denver law firm Leventhal, Brown & Puga, who represents patients in medical malpractice cases.

Nonetheless, mediating removes uncertainty, and that may be worth a lot. "At trial you're faced with winning or losing," Leventhal says. In mediation, "the patient is buying out the risk that they might lose."

This column is produced through a collaboration between The Washington Post and Kaiser Health News. KHN, an editorially independent news service, is a program of the Kaiser Family Foundation, a nonpartisan health-care-policy organization that is not affiliated with Kaiser Permanente.

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