Last Wednesday, a federal jury in Manhattan found former SAC portfolio manager, Michael Steinberg, guilty on all five insider trading charges related to trades he made in the shares of Dell and Nvidia. Steinberg was the highest-ranking employee at SAC Capital Advisors to stand trial for insider trading.
The Verdict
Mr. Steinberg, 41 years old, was convicted of four counts of securities fraud and one count of conspiracy for trading using confidential information.
Steinberg’s guilty verdict came after only ten hours of deliberation by the twelve person jury – a surprisingly short time for such a complex case. What is particularly important about this verdict is the fact that Steinberg was the first employee at SAC to go to trial for insider trading, after six other SAC staffers pleaded guilty to securities fraud and cooperated with the government (another SAC employee Mathew Martoma awaits his trial which in scheduled to start on January 6th). The Steinberg verdict is likely to encourage the government that they have enough evidence to prove there was insider trading at SAC.
Steinberg, who faces a maximum sentence of 85 years in prison, remains free on bail until his April 25th sentencing. Steinberg, however, is likely to receive a much shorter sentence of only a few years.
What Does The Verdict Mean?
A number of experts in US securities law suggest that the Steinberg verdict could mean a number of things for the government’s current war on insider trading. A few of these consequences include:
The Steinberg verdict was reached without the use of wiretap evidence or e-mail where Steinberg clearly requested the collection of inside information. In fact, the government’s star witness, Jon Horvath testified that Steinberg never overtly told him to gather inside information. This suggests that jurors are willing to convict an accused of insider trading based purely on circumstantial evidence. The government didn’t need a smoking gun to reach a conviction.
The Steinberg case was also built primarily on the testimony of Jon Horvath, a former SAC analyst who had previously pleaded guilty to insider trading charges and cooperated with the government in hopes of an easier sentence. The defense could not cast doubt in the jury that Horvath was lying to save his skin.
The Steinberg verdict could also embolden the DOJ to bring other insider trading cases that are not the “slam dunks” that previous cases had been. Some experts feel that the government’s perfect record in insider trading cases has convinced them that they know how to win these complex cases even without wiretap evidence. In addition, the government may feel that public opinion is on their side.
In addition, the Steinberg verdict is likely to convince defendants that the probability of winning an acquittal on an insider trading case at trial is not very good. Consequently, others accused of insider trading are more likely to accept pleas agreements and cooperate with the government in exchange for lighter sentences.
In our mind, all of this spells bad news for both Steve Cohen and Mathew Martoma. Clearly the Steinberg verdict could help the SEC in its civil case against SAC founder Steve Cohen. The SEC has accused Cohen of “failure to supervise” his staff. The fact that Steinberg was found guilty of insider trading could be used as evidence by the SEC of this very thing. In addition, the Steinberg verdict could be used to pressure Steinberg, Martoma, and others at SAC of the futility of trying to fight the government, and convince them instead to cooperate in their cases against Martoma and Cohen.
Summary
Wednesday’s verdict in the Michael Steinberg case marks the latest victory for federal prosecutors in their four-year battle against insider trading. The government’s impressive record is now 77 guilty pleas or convictions over the past four years, out of 87 people charged, involving a range of firms and individuals.
Ultimately, this latest guilty verdict suggests that the US government definitely has momentum on their side when it comes to prosecuting insider trading cases – a development that doesn’t bode well for others accused of insider trading.