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Insider trading trial spotlights trades by SAC's Cohen

Nate Raymond
Monday, 2 Dec 2013 | 4:34 PM ET

NEW YORK, Dec 2 (Reuters) - Portfolio manager Michael Steinberg sought to warn SAC Capital Advisors founder Steven A. Cohen that he was trading in the opposite direction to bets that were based on inside information, a former analyst at the hedge fund testified Monday.

Jon Horvath, a former analyst at SAC who is cooperating in the government's insider trading case against Steinberg, said that three days before Dell Inc announced its earnings in August 2008, Cohen was betting the company's stock would go up.

Horvath said that, at Steinberg's direction, he emailed another analyst, whose advice Cohen was following, about a second-hand read from someone at the company that the results would disappoint Wall Street.

After Dell's results were announced, Cohen congratulated Steinberg's team. "Nice job on dell," Cohen wrote in an email.

Horvath's testimony came at the start of the third week in the trial of Steinberg, the highest-level employee at SAC to face criminal charges over alleged insider trading.

SAC Capital agreed last month to plead guilty to fraud charges and pay $1.2 billion to resolve a long-running probe into insider trading at what had been a $14 billion hedge fund.

Steinberg, 41, has been charged with five counts of securities fraud and conspiracy to commit securities fraud on claims he used inside information to trade in Dell and Nvidia Corp in 2008 and 2009. He denies all wrongdoing.

The testimony by Horvath, 44, marked a rare instance in the trial in which Cohen's own trading was discussed.

Cohen has not been charged in the probe of his hedge fund, although the SEC has accused him in an adminstrative proceeding of failing to supervise Steinberg and another portfolio manager and prevent them from insider trading. He denies wrongdoing.

Jurors were not told Monday what action Cohen took in response to the tip, and prosecutors have said in court filings they do not plan to introduce his actual trading records.

But in pre-trial motions, they said Cohen ultimately avoided $3.5 million in losses on Dell after Horvath's email warning was forwarded to Cohen.

The bet by Steinberg's own team meanwhile resulted in about $1 million in profits, the indictment said.

BETTING ON DELL STOCK

Horvath, who has pleaded guilty and was on his third day of testimony as a government witness, said that Cohen's original bullish position on Dell appeared to be based on a recommendation by Gabriel Plotkin, another SAC analyst.

While Plotkin normally covered retail companies, SAC had in July 2008 sent him, rather than Horvath, who covered technology companies, to an investor conference attended by Dell officials.

Based on Plotkin's recommendation, Cohen as a result was betting the Dell's stock would go up after its earnings were announced Aug. 28, 2008, Horvath said. But Horvath said he had been tipped that the company's gross margins were below Wall Street expectations, setting the stage for the stock to drop.

Horvath said his tip, along with previous ones, had come from Jesse Tortora, an analyst at the time working for hedge fund Diamondback Capital Management.

Prosecutors have said Horvath and Tortora belonged to a "corrupt circle" of Wall Street analysts who swapped insider tips to give their hedge fund bosses for trading.

At SAC Capital, Horvath said employees were encouraged to pass along trading ideas to Cohen and could receive a piece of any profits he earned as a result.

"There was some kind of obligation to help Steve if you had conviction or good reason for the position," Horvath said.

When Cohen's Dell position became apparent, Horvath alerted Steinberg, who emailed that he had "not mentioned anything to him yet" and said he wanted to "express out view" to Cohen.

But Steinberg cautioned they should weigh the risk and rewards of alerting Cohen. Horvath said the "main reason was we didn't want to be wrong."

"It wasn't good politically," Horvath said. "Steve didn't like to lose money."

After further email discussion, including about Tortora's data, Steinberg on Aug. 26, 2008, said he had discussed Dell with Cohen, who asked to have Horvath and Plotkin "compare notes."

Horvath, who was in Mexico on vacation, that day emailed Plotkin about his second hand read that the information that Dell's gross margins would disappoint Wall Street. He added to "keep to yourself as obviously not well known."

"It wasn't out there," Horvath testified. "Investors weren't expecting this miss. And I didn't want it out there."

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