U.S. prosecutors on Friday charged Michael Steinberg, a veteran portfolio manager at Steven A. Cohen's hedge fund, with insider trading in two technology stocks, the most senior SAC Capital Advisors' employee to be indicted in the government's long-running probe.
FBI agents arrested Steinberg at his Park Avenue home in New York City at around 6 a.m. EDT (1000 GMT). Steinberg, wearing a blue sweater, pleaded "not guilty" to charges of securities fraud and conspiracy to commit securities when he appeared at a late morning arraignment.
The five-count indictment charges Steinberg, 40, with using inside information to trade shares of computer maker Dell Inc DELL.O and chipmaker Nvidia Corp (NVDA.O) in 2008 and 2009 that generated about $1.4 million in illegal profits for Cohen's $15 billion hedge fund.
In a related civil complaint against Steinberg, the U.S. Securities and Exchange Commission said the information allowed Steinberg to generate $6.4 million in profits and avoided losses for the hedge fund.
Barry Berke, Steinberg's lawyer, said in a statement that his client had done "absolutely nothing wrong" and his "trading decisions were based on detailed analysis."
The charges come after a tumultuous six months for Cohen, one of the most successful hedge fund traders. It began with last November's arrest of former SAC portfolio manager Mathew Martoma in what prosecutors had described as the largest U.S. insider-trading case.
Martoma pleaded not guilty to charges of insider trading in Elan Corp ELN.I and Wyeth that allegedly resulted in profits and avoided losses totaling $276 million.
SAC Capital agreed two weeks ago to pay a $616 million penalty to the SEC to settle allegations of improper trading by the firm arising out of the Martoma investigation and alleged improper trading in Dell and Nvidia. SAC neither admitted nor denied wrongdoing as part of that settlement.
But a federal judge on Thursday said he was reserving his decision on approving the deal.
Mounting concern over the insider trading probe prompted outside investors in SAC Capital to submit redemption notices last month to withdraw up to $1.68 billion from Cohen's firm. Several outside investors, including Blackstone Group (BX.N), declined to comment on Steinberg's arrest.
Cohen, a multi-billionaire, has not been charged with any wrongdoing. A well-known art collector, he recently purchased Pablo Picasso's "Le Reve" from casino owner Stephen Wynn for $155 million and, according to The New York Times, bought a $60 million oceanfront home in East Hampton, N.Y.
$3 MILLION BOND
Steinberg is one of nine current or former employees of SAC Capital who have been charged or implicated with insider trading while working at Cohen's two-decade-old hedge fund.
His arrest had been widely expected after Jon Horvath, a former SAC analyst who reported to Steinberg, pleaded guilty last year to using illegally obtained information to trade in Dell. Horvath has been cooperating with the government and had implicated Steinberg.
Steinberg was suspended last autumn from his post at SAC Capital's Sigma Capital division and remains on paid leave.
SAC Capital spokesman Jonathan Gasthalter said: "Mike has conducted himself professionally and ethically during his long tenure at the firm. We believe him to be a man of integrity."
Prosecutors have introduced emails that they said indicated Steinberg had access to inside information about potential weakness in Dell's earnings, in advance of the personal computer maker's August 2008 results announcement.
Federal authorities contend the improper trading by Steinberg largely involved short positions and derivative trades. The trades involving shares of Dell occurred in August 2008, while the trading in Nvidia took place in May 2009.
The SEC complaint said some of the trading in Dell was done by a SAC portfolio called SAC Select. People familiar with SAC Select said it used computer-driven trading strategies to mimic the trades of some of SAC Capital's top portfolio managers.
The complaint against Steinberg made no reference to Cohen, unlike the criminal and civil cases filed by against Martoma, which was the first time authorities had alluded to him as the "owner" of the hedge fund.
Steinberg had been moving among several hotels in New York City in recent weeks, according to Reuters sources, as he wanted to avoid being arrested at his Upper East Side home where he lives with his wife and two children.
Following the arraignment before U.S. District Judge Richard Sullivan in lower Manhattan on Friday morning, Steinberg was released after agreeing to post $3 million in bond, which was secured by $1 million in property.
During the proceeding, a federal prosecutor said no search warrant was served on the hedge fund in connection with the charges against Steinberg.
In announcing the $616 million settlement with SAC Capital, lawyers with the SEC made clear the deal did not preclude further charges against individuals or from other trading at SAC Capital that is still be investigated. As part of that settlement, SAC Capital agreed to pay $14 million to settle charges of improper trading in Dell.
On Thursday, a federal district judge reviewing the part of the settlement involving trading in shares of Elan and Wyeth, now a part of Pfizer (PFE.N), said he was reserving decision for now.
The cases in U.S. District Court, Southern District of New York are: United States v. Steinberg, No. 12-cr-121, and Securities and Exchange Commission v. Steinberg, No. 13-2082.