Hedge-Fund Fight Club Traded Illegal Tips Not Punches

Hedge-Fund Fight Club Traded Illegal Tips Not Punches

The hedge-fund analysts vacationed together in the Hamptons, gambled in Las Vegas and adopted a creed that parodied the rules in the Brad Pitt film “Fight Club.” Instead of trading punches, they traded illegal tips that allowed their portfolio managers to reap tens of millions of dollars in profit. Having pleaded guilty to insider trading, four of the men are now set to be witnesses against SAC Capital Advisors LP fund manager Michael Steinberg. Ex-SAC analyst Jon Horvath could take the stand as early as today in Manhattan federal court against his former boss after ex-Diamondback Capital Management LLC analyst Jesse Tortora concludes his testimony.The group funneled secret tips about technology companies to their bosses, allowing Steinberg, 41, to earn more than $1.4 million from 2007 to 2009, according to prosecutors in the office of Manhattan U.S. Attorney Preet Bharara. Steinberg, who went on trial last week, has pleaded not guilty. He faces 20 years in prison if convicted.

Steinberg’s trial is providing a rare glimpse into the workings at SAC, the Stamford, Connecticut-based hedge fund founded and owned by billionaire Steven Cohen. Bharara has called SAC “a veritable magnet for market cheaters.” Cohen hasn’t been charged with a crime.

Game Theory

Tortora told Steinberg’s jury that his group had mockingly described a set of rules that riffed on the motto from the 1999 movie “Fight Club.”

“Rule number one about email list, there is no email list (fight club reference),” Tortora wrote in a March 2009 e-mail introducing a newcomer to the group. “Rule number two, only data points can be sent, no sarcastic comments. Enjoy. Your perf[ormance] will go up by 100% in 2009 and your boss will love you. Game theory … look it up.”

Tortora testified that unlike the movie, in which fight club members were sworn to secrecy, members of his club and their bosses knew the information was being shared.

“It wasn’t kept a secret,” Tortora said. “It was shared with our portfolio managers. At times the e-mail list would be forwarded from someone in the group to a portfolio manager. I would do that.”

Tortora told jurors his boss, former Diamondback portfolio manager Todd Newman, knew he swapped tips with his friends while Horvath informed him he shared the tips with Steinberg. Newman was convicted of insider trading by a Manhattan federal jury last year.

Formed Group

“I told Jon I was passing or passed inside information to Todd Newman and he in turn told me he was communicating that information to Mike Steinberg,” Tortora testified. “He told me he directly worked for Mike Steinberg and that Mike had status at SAC. He told me that Mike was ‘Steve Cohen’s right-hand man.’”

Tortora said he and Horvath, who had previously been a client, first formed the group shortly after he joined Diamondback in mid-2007. Other members included Spyridon “Sam” Adondakis, a Level Global Investors LP analyst; Ron Dennis, then an analyst at SAC’s CR Intrinsic unit, Danny Kuo, who worked at wealth-management company Whittier Trust Co.; Sandeep “Sandy” Goyal, a Neuberger Berman analyst who once worked at Dell and Hyung Lim, a former Altera Corp. (ALTR) executive.

All, except Dennis, who hasn’t been charged with wrongdoing, have pleaded guilty and are cooperating with the U.S. In addition to Tortora and Horvath, Kuo and Goyal are expected to testify against Steinberg.

More Effective

Tortora and Adondakis, who both testified last year at the federal trial of their former fund managers that the group often socialized and dined together, vacationed together and that some of them shared beach house rentals in the Hamptons, on New York’s Long Island.

Asked by the prosecutor why analysts would share information with competitors at other funds, Tortora told jurors last week that they joined forces because “it allowed us to be more effective, more efficient and more profitable than working alone.” In all, there were seven analyst members of the group and at least four fund managers who received their tips, prosecutors said.

The goal for improving their success rate was based on “game theory,” a study of strategic decision making, Tortora said.

“Game theory is the collection of individuals working together will exceed the individual working alone,” Tortora said. “So the sum of the parts collectively will be greater than the parts of the sum individually. That is why we decided to work together. It allowed us to be more effective, more efficient, and more profitable.”

Positive View

One of Horvath’s tips, that Dell was about to miss earnings estimates, made it to Cohen, who traded on it in late August 2008, prosecutors said in pre-trial court papers, without indicating whether Cohen was aware of the information’s origins.

“Horvath became aware that the head of the firm, Steven Cohen, held a long position in Dell securities, reflecting Cohen had a positive view of the company,” prosecutors said in a motion to limit evidence at the trial.

“If Cohen lost money based on a portfolio manager’s recommendation, Cohen was likely to be upset, and the portfolio manager’s losses on the trade would be netted against any future profits in Cohen’s book,” prosecutors said.

One of the most profitable of the tips Horvath provided came on Aug. 26, 2008, two days before Dell was set to report second-quarter earnings.

Short Position

While vacationing in Mexico, Horvath talked for 11 minutes by phone to Tortora, who alerted him that Goyal informed him that Dell would miss its earnings estimates, the U.S. said.

Three minutes later, phone records show Horvath telephoned Steinberg, prosecutors said. Minutes later Steinberg began shorting Dell stock. Eventually he would hold a short position in Dell of more than $8 million, according to the U.S.

Days later, Horvath sent Steinberg and SAC fund manager Gabriel “Gabe” Plotkin an update on Dell’s upcoming earnings and explained his reasoning for the short position. Plotkin hasn’t been charged with a crime.

“I have a 2nd hand read from someone at the company,” Horvath began the Aug. 26, 2008, message, which provided details on gross margins, expenditures and revenue. “Please keep to yourself as obviously not well known … just mentioning because JT [Jesse Tortora] asked me specifically to be extra sensitive with the info.”

‘Nailed It’

Steinberg, a 15-year veteran of the hedge fund, responded: “Yes normally we would never divulge data like this, so please be discreet. Thanks.”

Thirteen minutes after Dell formally made its earnings announcement on Aug. 28, 2008, Horvath sent Tortora an instant message that stated, “Nice Man!!!!! You nailed it!!!!”

Horvath warned Cohen’s trader about the new information about Dell, prosecutors said. Minutes after receiving Horvath’s message, Cohen, who had owned about 500,000 shares of Dell, began “liquidating his entire position” prosecutors said. By the time Dell announced its earnings on Aug. 28, 2008, Cohen avoided losses of $1.7 million in his portfolio and another $1.8 million in a second SAC portfolio, the U.S. said.

“Nice job on Dell,” Cohen wrote to Steinberg and his analyst, according to prosecutors, citing an SAC e-mail.

Too Late

At a federal trial in Manhattan last year, Adondakis, Goyal and Tortora testified against Newman and Level Global Investors LP co-founder Anthony Chiasson, who prosecutors said reaped more than $72 million on the group’s illegal tips. Both Chiasson and Newman, who were found guilty, are appealing their convictions.

Barry Berke, Steinberg’s lawyer, told jurors in opening statements that Horvath pleaded guilty just weeks before the start of his insider-trading trial after he realized members of the group agreed to plead guilty and testify against him.

“He wanted to avoid jail but he was too late, his circle of friends had pleaded out,” Berke said. “He needed to point the finger at somebody else to get a deal. He traded his freedom for that of another. He chose his self-interest over the truth and claimed Michael Steinberg was involved in his misdeeds.”

The case is U.S. v. Steinberg, 12-cr-00121, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Patricia Hurtado in Federal Court in Manhattan at


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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