NEW YORK - 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 is next to take the stand in Manhattan federal court against his former boss after ex-Diamondback Capital Management 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, Conn.-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.
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 performance] will go up by 100% in 2009 and your boss will love you. Game theory .<!p>.<!p>. 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.
"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.'<!p><#148>
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. 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.
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.