Federal Bureau of Investigation officials arrested a trader from SAC Capital for insider trading on Friday, in the latest push by authorities against the controversial hedge fund.
Michael Steinberg, a portfolio manager at SAC affiliate Sigma Capital Management, faces criminal and civil charges of insider trading and securities fraud from the Department of Justice and the Securities and Exchange Commission.
The charges said he traded on advance information of quarterly results of tech companies Dell and Nvidia, reaping millions in profits and avoided losses for an SAC fund.
Steinberg's lawyer denied the charges, which came weeks after Sigma analyst Jon Horvath settled charges and Sigma itself agreed to pay $14 million in fines related to the same insider trading.
The charges allege that Steinberg made profitable trades based on earnings-related tips from company insiders that were routed through a small network of hedge funds and analysts.
Sigma gained more than $6 million in profits and avoided losses from the information, according to the SEC.
"Steinberg essentially got an advance copy of Dell and Nvidia's quarterly earnings announcements, allowing him to trade on tomorrow's news today," said George Canellos, acting director of the SEC's Division of Enforcement.
"As alleged, Mr. Steinberg was at the center of an elite criminal club, where cheating and corruption were rewarded," said FBI Assistant Director George Venizelos.
"The law is clear for everyone including Mr. Steinberg. Trading on inside information is illegal."
Steinberg's attorney Barry Berke told the Wall Street Journal Friday that his client "did absolutely nothing wrong."
"His trading decisions were based on detailed analysis" and information that Steinberg "understood had been properly obtained through the types of channels that institutional investors rely upon on a daily basis."
An SAC spokesman defended Steinberg.
"Mike has conducted himself professionally and ethically during his long tenure at the firm," the spokesman said. "We believe him to be a man of integrity."
The SEC indictment shows how advance information on Dell's gross margins in a particular quarter in mid-2008 was transmitted by an employee of Dell's investor relations department to an analyst for an asset management fund.
That analyst relayed the information to Jesse Tortora, who worked at hedge fund Diamondback Capital Management, who in turn relayed it to Steinberg's colleague Horvath.
Fourteen minutes after speaking with Tortora, Horvath spoke by telephone with Steinberg and about a minute later, Steinberg's fund began shorting Dell shares, the indictment said.
By the end of the day, Steinberg's portfolio had acquired a net short position of more than 167,000 shares.
In the Nvidia case, information that Nvidia's gross margins would be lower than market expectations came from an insider in Nvidia's finance department.
That analyst passed the information through Tortora and Horvath, among others, and Steinberg was accused of being behind trades executed for Sigma funds ahead of the company's earnings announcement.
Steinberg's arrest was the most recent incident in the long-running investigation into SAC, one of the leading names of the New York hedge fund community, and its founder billionaire Steven A. Cohen.
In addition to the Sigma fine, on March 15 the SEC also hit SAC affiliate CR Intrinsic Investors with a record $602 million penalty to settle charges that it earned massive profits on confidential information involving the clinical trial of an Alzheimer's drug.