But the government may be holding a card that makes their case strong enough to overcome that hurdle.
The insider trading case against a longtime SAC Capital Advisors trader will be tough for federal prosecutors to prove , but perhaps not as tough as some believe.
On Friday, authorities arrested and charged Michael Steinberg with criminal insider trading in shares of Dell and Nvidia. Steinberg has worked at SAC Capital for 16 years and is the ninth person connected with the firm whom officials have linked to such trading; four have pleaded guilty.
The government alleges that Steinberg received inside information about Dell and Nvidia from Jon Horvath, a former analyst at SAC who has admitted to insider trading.
According to the indictment, in August 2008, Horvath got confidential information about Dell's performance from Jesse Tortora, then an analyst at Diamondback Capital. Tortora had obtained it from Sandeep "Sandy" Goyal, then a tech stock analyst at Neuberger Berman. Goyal had worked at Dell for three years and maintained contacts with former colleagues, at least one of whom shared confidential details with him.
The indictment also says that in May 2009 an analyst at Whittier Trust Co. named Danny Kuo passed Nvidia confidential information to Tortora and Horvath, who gave it to Steinberg. Kuo allegedly had received it from someone at another tech company, who had received it from a person at Nvidia.
Notice something about both those claims? The chain is very long. From the prosecution's view, the ideal insider trading case has an actual insider engaged in trading. The next remove is having someone tipped by an insider engaging in trading. In the Dell-related charges, we have Steinberg tipped by someone who was tipped by someone who was tipped by someone who knew a company insider.
That's a lot of someones standing between Steinberg and the original breach of a legal duty of confidentiality.
If somewhere along the line the knowledge of the illicit and confidential nature of the information was rubbed away, the case could fall apart.
The prosecution will have to show that Steinberg knew that the information he was receiving was confidential and part of a stream of illicitly obtained insider tips-rather than the product of keen stock analysis or innocent leaks. Much of that will depend on what Horvath says he told Steinberg-and whether a jury finds Horvath credible.
That might be difficult because Horvath has already admitted to engaging in securities fraud. Steinberg's lawyers will point out that the word of a fraudster isn't a lot to build a case on. They are also likely to note that Horvath has been given a promise of leniency in exchange for cooperation in implicating his former boss.
But claiming that Horvath isn't a credible witness won't be so easy if there are other cooperating witnesses who haven't been named yet.
In December, federal prosecutors scored victories in a pair of similar cases. Level Global Investors LP co-founder Anthony Chiasson, a former SAC Capital trader, and former Diamondback Capital Management trader Todd Newman were convicted in a $72 million scheme that bears a very close resemblance to the case against Steinberg.
The case against Newman and Chiasson also involved trading in shares of both Dell (based on information from Goyal) and Nvidia (based on information from Kuo). Tortora said he passed on information to Newman, his boss at Diamondback. Spyridon "Sam" Adondakis, a former analyst at Level Global, said he passed information to Chiasson.
Of course, both were also tainted in the same way witnesses against Steinberg are. The guilty verdicts against Chiasson and Newman no doubt buoyed prosecutor hopes that a jury can be persuaded that criminal insider trading liability can travel these long lines.
The case against Steinberg has one extra step, another "someone." Whereas Tortora and Adondakis testified that they passed directly to their bosses, prosecutors in the Steinberg case allege the information went through an additional person-Horvath-before getting to Steinberg. That's why the defense is likely to concentrate on undermining that link.
The indictment doesn't mention it, but prosecutors already have a powerful rebuttal to attacks on Horvath.
During the Chiasson trial, Adondakis testified that he had told him Horvath was passing to Steinberg. He will likely be called on to bolster Horvath's credibility if the defense attacks it.
That could tip the balance. Instead of relying on Horvath's word against Steinberg, the prosecution can argue that long before he had any reason to implicate his boss, Horvath had revealed to Adondakis that Steinberg knew about the illegal tips.
In other words, this alleged club of hedge fund guys sharing inside information may have also shared information about who they were tipping-not all that surprising, when you think about it. And that could undermine Steinberg's biggest legal advantage in his defense.
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