DealBook: On Witness Stand, Former Analyst Describes Insider Trading Scheme

Mike Segar/Reuters and Charles Krupa/Associated PressAnthony Chiasson, left, a co-founder of the Level Global Investors hedge fund, and Todd Newman, once a portfolio manager.

In 2008, Jesse Tortora, a junior tech-stock analyst, made $2.25 million, his best year at the hedge fund Diamondback Capital Management.

“It was a very good job,” said the defense lawyer Stephen Fishbein during his questioning of Mr. Tortora in Federal District Court in Manhattan on Thursday.

“How would you define that?” Mr. Tortora asked.

“You liked being there,” Mr. Fishbein responded.

“No, I did not,” Mr. Tortora snapped back.

The fresh-faced Mr. Tortora, 35, also did not like being at the criminal trial of Todd Newman, his former boss at Diamondback, and Anthony Chiasson, the co-founder of the hedge fund Level Global.

But he sat in the witness box over two days this week, testifying dutifully as one of the government’s key cooperators in the case. Federal prosecutors have accused Mr. Newman and Mr. Chiasson of being the most senior members of an eight-person insider trading conspiracy that earned about $70 million by illegally trading technology stocks. Both men have denied they were part of any conspiracy and say that their underlings are using them as scapegoats to curry favor with the government and avoid prison.

Mr. Tortora, who has pleaded guilty along with five others, is the centerpiece of the government’s case against Mr. Newman. On Thursday morning, Mr. Totora described in his direct examination how Sandeep Goyal, a former tech-stock analyst at Neuberger Berman, fed him secret financial information about the computer maker Dell that he then passed on to Mr. Newman. Mr. Tortora said that Mr. Newman knew the information was confidential.

In perhaps the most incriminating part of Mr. Tortora’s testimony, he told the jury how Mr. Newman helped facilitate $175,000 in “consulting payments” to Mr. Goyal’s wife. Mr. Goyal had been unable to accept the payments directly because he was not allowed to receive outside compensation while employed at Neuberger.

During cross-examination, Mr. Fishbein, a lawyer for Mr. Newman, sought to portray Mr. Tortora as a disgruntled employee with an ax to grind. When the F.B.I. knocked on his door in late 2010, Mr. Tortora had already left the firm and had every incentive to throw his boss under the bus to protect himself, Mr. Fishbein suggested.

“Isn’t it true you understood that your ticket to freedom was to give evidence against Todd Newman?” Mr. Fishbein asked.

“No, that’s untrue,” Mr. Tortora said.

Mr. Tortora said that he resigned from Diamondback in April 2010 after the firm refused to give him “his own book” – a term for letting him manage his own pool of money. He also said that Mr. Newman was an “abusive boss” and that their relationship had deteriorated by the time he left.

There was testimony about a nasty phone exchange between Mr. Tortora and Mr. Newman around his departure date. Mr. Tortora acknowledged that he told Mr. Newman during the call, “You’re going to have to see me at conferences.”

Mr. Fishbein suggested that Mr. Tortora meant that as a physical threat, but Mr. Tortora denied that he meant it in that way.

The defense also tried to attack Mr. Tortora’s credibility by focusing on a disputed expense report that Mr. Tortora had submitted around the time he left. Mr. Tortora had claimed about $7,500 for a business trip to San Francisco, but the fund told him that it was only going to cover $6,100. Mr. Tortora acknowledged that his girlfriend traveled with him, accompanying him on many of his work excursions.

“We cannot reimburse you for magazines such as Life & Style and OK magazine,” wrote a Diamondback official. “Lastly, we do not reimburse for movies.”

Mr. Tortora said that Diamondback had never before had a problem with his expenses, but in the end agreed to reimburse the fund. “In the end, I accepted it and moved on,” he said.

After Mr. Tortora agreed to cooperate with the authorities, he recorded conversations with several of his friends in an effort to entrap them, he acknowledged. On one those calls, Mr. Tortora told Danny Kuo, a Los Angeles-based tech-stock analyst who has since pleaded guilty, that the government wanted to make Mr. Newman “the fall guy” and they wanted his help investigating him. Mr. Tortora testified that he was sticking to a “fictional” script fed to him by the F.B.I.

“You pushed the blame to Todd Newman,” Mr. Fishbein said. “You made stuff up, didn’t you?”

“I told the truth,” Mr. Tortora said.

As with nearly every trial, the testimony was plodding at times. The tedium apparently led a juror to request an extra jolt of caffeine. As Judge Richard J. Sullivan, who was overseeing the trial, excused the jury for their 10-minute afternoon break, he told Juror No. 1 that he had fulfilled his request to stock the jury room with Red Bull.

The trial resumes on Monday with more cross-examination of Mr. Tortora.

DealBook: Citigroup Pays Fine and Fires Star Technology Analyst

John Tlumacki/Boston GlobeWilliam F. Galvin, the top financial regulator in Massachusetts.

Citigroup paid a $2 million fine and fired a prominent technology analyst after authorities accused the bank of improperly leaking to the media unpublished information about YouTube and confidential research on Facebook‘s initial public offering.

William F. Galvin, the Massachusetts secretary of the commonwealth, accused a junior Citigroup analyst of sharing nonpublic information about Facebook to TechCrunch, a blog focused on the technology world. The disclosure included Citigroup’s private revenue estimates for Facebook, as well as “Investment Risks” and “Investment Positives.”

Citigroup fired the junior analyst in September, according to Mr. Galvin’s order.

In a more surprising move, the bank on Friday also terminated his boss, Mark Mahaney, according to a person briefed on the matter.

“We are pleased to have this matter resolved,” a Citigroup spokeswoman said in a statement. “We take our internal policies and procedures very seriously and have taken the appropriate actions.”

Mr. Mahaney, a star analyst who covered the recent wave of technology I.P.O.s for Citigroup’s San Francisco research team, was not accused of any legal wrongdoing over Facebook’s public offering. The leak came solely from the junior analyst.

Mr. Mahaney was, however, blamed for not thwarting the illegal activity. Mr. Galvin did not disclose the name of the junior analyst.

Mr. Galvin’s order further took aim at Mr. Mahaney for discussing YouTube’s earnings with a reporter from a French magazine, Capital, without permission from Citigroup. The dialogue conflicted with Citigroup’s policy that research analysts receive internal approval before talking to reporters. The bank, like most Wall Street firms, also prevents analysts from expressing a viewpoint on companies unless the information is published in a report.

But ultimately, according to the person briefed on the matter, the decision to fire Mr. Mahaney had less to do with a breach of arcane compliance rules than his perceived cover-up.

The French reporter approached Mr. Mahaney in April seeking projections about YouTube’s revenue and earnings growth — information that Citigroup had not yet published in a report. Mr. Mahaney gave a terse e-mail reply that answered the essence of the reporter’s questions.

But when a bank spokeswoman followed up to remind Mr. Mahaney about seeking approval before an interview, he denied ever e-mailing the reporter. “I won’t respond,” he said, according to Mr. Galvin’s order.

The reporter later informed Citigroup that Mr. Mahaney did in fact respond. According to Mr. Galvin’s order, the analyst then asked bank employees to fudge the timing of the interview, an apparent attempt to avoid blame for not seeking approval.

When told that the accurate time was already submitted, he replied in an e-mail cited in the order: “This could get me into trouble. Shoot.”

It is unclear whether his e-mails amount to legal violations. But securities rules, Mr. Galvin noted, prohibit “unethical or dishonest conduct.”

Mr. Galvin also cited past problems in which Citigroup rebuked Mr. Mahaney for granting a February interview to Bloomberg Radio about Facebook before he officially covered the company. On another occasion this year, Mr. Galvin said, Citigroup cited Mr. Mahaney for not receiving approval before going on Canadian television.

Despite the focus on Mr. Mahaney, the main legal violations stemmed from the disclosure of Facebook information.

In May, the junior Citigroup analyst e-mailed two TechCrunch employees to say “I am ramping up coverage of FB and thought you guys might like to see how the street is thinking about it (and our estimates).” He attached a “Facebook one pager,” that featured an array of confidential information, including Mr. Mahaney’s private revenue estimates meant as an internal guide for the bank’s analysts.

Under securities rules and a nondisclosure agreement with Facebook, Citigroup analysts were banned from “disseminating written research” about the social networking giant until 40 days after the I.P.O. The restriction, which applied to all banks that helped take Facebook public in May, was created to prevent research analysts from improperly promoting companies in a bid to drum up business for bankers.

The rules were reinforced in a landmark 2003 settlement with several banks, including Citigroup. The case, led by a former New York attorney general, Eliot Spitzer, built a Chinese wall between Wall Street research analysts and investment bankers.

A TechCrunch employee sought to post the document on the Web, but the junior analyst balked.

“My boss would eat me alive,” he said.

DealBook: Ex-SAC Analyst Pleads Guilty in Insider Trading Conspiracy

Shannon Stapleton/ReutersJon Horvath pleaded guilty to insider trading charges Friday.

8:31 p.m. | Updated

The billionaire investor Steven A. Cohen and his hedge fund, SAC Capital Advisors, are again in the spotlight over insider trading crimes committed by former employees.

Jon Horvath, a onetime technology industry analyst at SAC, pleaded guilty on Friday to insider trading a month before his scheduled trial. He is the fourth former SAC employee to admit to illegal trading while employed at the fund, which manages $14 billion. SAC has been a focus of federal authorities since the government began its crackdown on insider trading at hedge funds five years ago.

The admission by Mr. Horvath, who entered his guilty plea in Federal District Court in Manhattan, increases the pressure on the co-defendants in his case: Anthony Chiasson, who was a co-founder of Level Global Investors, and Todd Newman, a portfolio manager at Diamondback Capital Management.

Federal prosecutors contend they were part of a seven-person conspiracy — a “circle of friends” — that earned about $62 million in illegal gains trading on secret tips from executives at publicly traded technology companies. Mr. Horvath, 42, is the fifth person to plead guilty and cooperate with the government. Several of the cooperators are expected to testify against Mr. Chiasson and Mr. Newman at their trial, which is set for Oct. 29.

Mr. Horvath’s guilty plea also puts the focus on another SAC trader. Michael Steinberg, who supervised Mr. Horvath at SAC, emerged as an unindicted co-conspirator in the case last week.

During his court appearance on Friday, Mr. Horvath said that he obtained confidential information about the technology companies Dell and Nvidia and then “provided the information to the portfolio manager I worked for and we executed the trades based on that information.” That portfolio manager is Mr. Steinberg, according to two people with direct knowledge of the matter who requested anonymity.

Mr. Steinberg, 40, is one of Mr. Cohen’s longtime lieutenants, having worked at SAC since 1997. Barry H. Berke, a lawyer representing Mr. Steinberg, declined to comment.

“Until today, Mr. Horvath maintained he had not violated the law and we gave him the benefit of the presumption of innocence,” said Jonathan Gasthalter, an SAC spokesman. “We are disappointed and angered to learn Mr. Horvath admittedly violated the law and SAC’s policies forbidding insider trading. We expect our employees to have integrity, play by the rules and follow the letter and spirit of the law.”

Steven R. Peikin, a lawyer for Mr. Horvath, declined to comment. John A. Nathanson, a lawyer for Mr. Newman, and Gregory Morvillo, a lawyer for Mr. Chiasson, also declined to comment.

Though he has not been charged in the case, Mr. Steinberg is now the fifth employee or former employee of SAC tied to insider trading while at the fund. Last year, two former SAC portfolio managers — Donald Longueuil and Noah Freeman — admitted to trading on illegal tips about publicly traded technology companies. Mr. Longueuil is serving a two-and-a-half-year jail term at a federal prison in Otisville, N.Y.; Mr. Freeman, who is cooperating with prosecutors, has yet to be sentenced.

Jonathan Hollander, a former SAC analyst, paid more than $220,000 to settle civil charges brought by the Securities and Exchange Commission accusing him of trading in his personal account on confidential information about the takeover of the Albertsons grocery store chain.

A number of Mr. Horvath’s co-conspirators also have deep SAC connections. Mr. Chiasson left SAC to co-found Level Global, which closed last year. Mr. Newman’s fund, Diamondback, was started by SAC alumni, including Mr. Cohen’s brother-in-law, Richard Schimel. Diamondback remains in business, and Mr. Schimel has not been implicated in the case.

Mr. Cohen and SAC have not been accused of wrongdoing. The fund, based in Stamford, Conn. with about 1,000 employees, has a 20-year track record that is one of the best investment records in the hedge fund industry. The fund is up about 8 percent year-to-date.

SAC has an unconventional structure. Unlike other hedge fund managers who make all the investment decisions, Mr. Cohen manages less than 10 percent of the fund’s money, distributing the rest to about 140 small teams. It is a high-pressure culture where Mr. Cohen will reward teams that perform well with increased allocations, while underperformers can get cut back or lose their jobs. The more money a team manages, the greater its potential earnings.

His success as a stock picker has made Mr. Cohen, 56, one of the richest people in the country, with a net worth of $8.8 billion, according to Forbes magazine. He has also minted a stable of multimillionaires; in profitable years, top traders at SAC have earned tens of millions of dollars.

Mr. Horvath, a Swedish citizen who now resides in San Francisco, faces a maximum prison sentence of 45 years, though he is expected to receive far less. He also could face deportation after serving time.

The charges against Mr. Horvath are part of a vast crackdown on insider trading by federal authorities in Manhattan that has yielded prosecutions of 72 people, 69 of which have resulted in convictions.

This post has been revised to reflect the following correction:

Correction: September 28, 2012

An earlier version of this article misspelled the surname of Steven A. Cohen’s brother-in-law. It is Richard Schimel, not Shimel.