The Odds May Never Be in Your Favor

Former SAC Capital portfolio manager Michael Steinberg.
Photo: Bloomberg News.

This editor’s letter appeared in the most recent print edition of Alpha, which went to press in November. Steinberg was convicted of conspiracy and securities fraud on December 18.

Before making an investment most successful hedge fund managers carefully weigh the risks against the potential rewards, looking for situations in which the odds are solidly in their favor. In that context it’s hard to understand the decision by former SAC Capital Advisors portfolio manager Michael Steinberg to go to court to fight federal insider trading charges, even if he is entirely innocent.

Steinberg, whose trial began on November 19 and is expected to last at least a month, was indicted in March by the U.S. government on four counts of securities fraud related to trades he made in the shares of technology companies Dell and Nvidia Corp. According to the complaint, Steinberg traded on material, nonpublic information about the companies obtained illegally by Jon Horvath, an analyst who worked for him. Steinberg’s attorneys insist that he had no knowledge that Horvath’s intelligence on Dell and Nvidia had been improperly acquired. The feds have produced e-mails that would suggest otherwise.

The biggest problem for Steinberg is Horvath, who in September 2012 pleaded guilty to one count of conspiracy to commit securities fraud and two counts of securities fraud: The 43-year-old former analyst is the government’s star witness. Steinberg’s lawyers will likely try to discredit Horvath, but that may not be easy given that he is already serving a prison term of four and a half years. If convicted on all four counts of securities fraud, which each carry a maximum 20-year penalty, and an additional charge of conspiracy to commit securities fraud (a potential five-year penalty), Steinberg, 41, could end up behind bars far longer than his erstwhile colleague. That’s a pretty steep risk. Presumably, Steinberg thinks the reward of avoiding prison outweighs it. A lot of hedge fund managers, including his old boss Steven Cohen, will be watching closely to see how his high-risk wager plays out.

— Michael Peltz, Editor