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Wednesday, December 04, 2013

What is "edgy" information?

Michael Steinberg, a former portfolio manager at SAC, is currently on trial for engaging in insider trading. In a superseding indictment, the US Attorney's Office for the Southern District of New York has charged that Steinberg traded on material nonpublic information regarding Dell and Nvidia, and that he obtained this information from his employee, Jon Horvath.  Since there is no question that Steinberg/SAC actually traded in Dell and Nvidia, the major question for the jury will be Steinberg's state of mind: did he know (or possibly, have reason to know - more on that later) that Horvath was feeding him illegally obtained information?

Based on the testimony of the prosecution's star witness, Jon Horvath, the answer seems to be yes. Horvath - who is testifying pursuant to a cooperation agreement (see my thoughts here on how cooperation can ultimately undermine deterrence in the long run, despite all of its obvious benefits) testified at trial last week that Steinberg indicated during a meeting in 2007 that he wanted Horvath to provide "edgy, proprietary" information.  Horvath concluded that this meant "nonpublic" and illegally obtained information, but since this is Horvath's retelling of a conversation (and since Horvath never explicitly confirmed his own interpretation with Steinberg - because who in his right mind would?), that presumably leaves Steinberg's attorney, Barry Berke, some room to maneuver.  

Berke began his cross-examination yesterday, and according to this morning's news, Berke may have drawn a little blood by demonstrating problems with Horvath's story.  For example, it turns out that Horvath may have already been interested in securing "proprietary" information before he ever spoke to Steinberg.  Apparently Horvath heard exhortations to obtain such information as early as his first day of work at SAC - as he received emails and SAC memos advising him, in effect, to ask himself "what do I have that is proprietary?"  (Horvath helpfully pasted this reminder into a diary he kept for himself, called "Jon's trading rules" - because he worried he might otherwise forget?)  None of this looks particularly good for SAC, but SAC has already entered a guilty plea and has agreed to pay $1.2 billion and terminate its business managing outsiders' money.  

For a skilled defense lawyer like Berke, Horvath's memory lapse (he seemed to admit on cross that he can't quite remember when he had his "edgy and proprietary" convo with Steinberg) is helpful because it undercuts the idea that it was primarily Steinberg pushing Horvath to get this information, and at least suggests that Horvath may have embellished his direct testimony.  Does it actually absolve Steinberg, however?  I have a hard time believing so in light of some of the emails and texts introduced so far at trial (which, collectively, appear more problematic than exhortations to be "edgy"), but let's see what else surfaces. 


Posted by Miriam Baer on December 4, 2013 at 01:08 PM | Permalink


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I will be following this trial and your posts on this issue with interest.

Posted by: Marcia Narine | Dec 5, 2013 4:23:54 AM

Very interesting post, Miriam.

Posted by: Orin Kerr | Dec 4, 2013 2:28:56 PM

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