December 8, 2023

DealBook: SAC Capital Manager Arrested in Insider Trading Case

Federal agents have arrested a SAC Capital Advisors portfolio manager, the most senior employee at the giant hedge fund ensnared in the government’s vast insider trading investigation.

Michael Steinberg, 40, was arrested at his Park Avenue apartment early Friday morning and taken out of his building in handcuffs. He has worked for SAC and its owner, the billionaire investor Steven A. Cohen, since 1997 and became one of the firm’s senior portfolio managers, focusing on technology stocks.

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He is expected to make an appearance in Federal District Court in Manhattan on Friday before Judge Richard Sullivan.

“Michael Steinberg did absolutely nothing wrong,” said Barry H. Berke, a lawyer for Mr. Steinberg. “Caught in the crossfire of aggressive investigations of others, there is no basis for even the slightest blemish on his spotless reputation. Mr. Steinberg is thankful for all the people who have continued to stand by him and believe in his innocence.”

The arrest of Mr. Steinberg had widely been expected, and is the latest in a swirl of activity surrounding the investigation of SAC. Earlier this month, Mr. Cohen signed off on two settlements in which the fund agreed to pay federal securities regulators $616 million to resolve two insider trading cases against SAC. On Thursday morning, a federal judge refused to approve the larger of the two settlements, a $602 million pact, raising concerns over a provision that allows SAC to avoid admitting that it did anything wrong.

The smaller of the settlements, for about $14 million, related to trading by Mr. Steinberg and a fellow portfolio manager, Gabe Plotkin, according to people familiar with the case. Mr. Plotkin has not been charged with any wrondoing.

Mr. Steinberg’s name first surfaced in the broader probe last September when a former SAC analyst who worked under him pleaded guilty to being part of an insider trading ring that illegally traded the technology stocks Dell and Nvidia. As part of his guilty plea, the analyst, Jon Horvath, implicated Mr. Steinberg, saying that he gave the confidential information to his SAC boss and that they traded based on the secret financial data about those two companies.

In recent months, Mr. Horvath has met with authorities and provided them with information about his former boss.

The government has previously identified Mr. Steinberg, a technology stock specialist in SAC’s Sigma Capital unit, as a co-conspirator in a case involving Mr. Horvath and two former hedge fund managers at other firms, Todd Newman and Anthony Chiasson. A jury convicted Mr. Newman and Mr. Chiasson in December on charges that they traded shares of Dell while in possession of secret information about the technology company.

Mr. Steinberg has been named in a superseding indictment in Mr. Newman’s and Mr. Chiasson’s case, according to person familiar with Mr. Steinberg’s case.

Including Mr. Steinberg, at least nine current or former SAC employees have been tied to allegations of insider trading while working there. Four have pleaded guilty to federal charges.

Mr. Steinberg’s case will keep the spotlight on Mr. Cohen, 56, who has been a central target of the government’s investigation. Mr. Cohen has not been charged with any wrondoing, and has told his employees and investors that he believes that he at all times acted appropriately.

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DealBook: JPMorgan Report on Trading Loss Takes Aim at Top Executives

Jamie Dimon, chief of JPMorgan Chase, at the bank's headquarters in New York.Jin Lee/Associated PressJamie Dimon, chief of JPMorgan Chase, at the bank’s headquarters in New York.

The bad bet that cost JPMorgan Chase more than $6 billion has already provoked scrutiny from regulators and federal agents.

Now it is JPMorgan’s turn to assess the actions of its executives.

In a 129-page report attached to its quarterly earnings on Wednesday, the bank dissected the multibillion-dollar trading loss at the chief investment office, outlining a breakdown at the highest levels of management and detailing the “remedial” steps it has taken to heal a rare black eye.

Few surprises emerged from the report, which noted that the bank had overhauled its oversight of the chief investment office and fired the executives responsible for the trade. It was widely expected that the task force would issue a broad critique of the bank’s trading strategy and management.

Still, it is not often that a bank pulls the curtain back on its own executive fiasco. Some within JPMorgan were wary of releasing the report, worried that it would provide a road map for plaintiffs’ lawyers seeking to sue the bank. The chief executive, Jamie Dimon, reportedly supported a broad release of the document, however.

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The report, written by a JPMorgan management “task force,” spread the blame widely. Not even Mr. Dimon, long celebrated for his risk management prowess, was spared. The bank announced on Wednesday that Mr. Dimon, portrayed in the report as somewhat complacent, had his compensation halved to $11.5 million in response to the trading loss.

While the task force report acknowledged that Mr. Dimon could “appropriately rely upon” senior managers who oversaw the trading strategy, it concluded that he “could have better tested his reliance on what he was told.” Mr. Dimon has conceded as much in the past.

The task force, led by Michael J. Cavanagh, the bank’s co-head of corporate and investment banking, hinted at Mr. Dimon’s docked compensation. “Mr. Dimon bears some responsibility,” it said, adding that “Mr. Dimon reports to the board, and the board will weigh the extent of Mr. Dimon’s responsibility.”

Mr. Dimon is one of the best-paid executives on Wall Street. And the former leader of the chief investment office, Ina R. Drew, was one of the highest-paid people at the firm.

Yet the report did not take to task JPMorgan’s lavish compensation policies. “The firm’s compensation system did not unduly incentivize the trading activity that led to the losses,” the report stated.

The bank’s board also received a pass. In a separate 18-page report released on Wednesday, the board aimed to clear itself of any wrongdoing, claiming that directors “discharged their duties with respect to the oversight of the firm.” The board’s report noted that problems were “not timely elevated” to its attention.

The main report from Mr. Cavanagh, while somewhat critical of Mr. Dimon, leveled some of its harshest attacks on the executives who oversaw the trade, a complex credit derivatives bet. “Responsibility for the flaws that allowed the losses to occur lies primarily with C.I.O. management,” the report said.

Ms. Drew, a once-lauded leader of the chief investment office who helped steer the bank through the financial crisis, received the brunt of the blame.

“Ina Drew failed in three critical areas,” the report said, pointing to lax controls, her underestimate of the “magnitude” of the problem and her breakdown in ensuring that her team “understood and vetted the flawed trading strategy and appropriately monitored its execution.”

The management missteps also ensnared Barry L. Zubrow, a former chief risk officer, and Douglas L. Braunstein, formerly the bank’s chief financial officer who is now a vice chairman at the bank.

The Task Force also believes that Barry Zubrow, as head of the Firm-wide Risk organization before he left the position in January 2012, bears significant responsibility for failures of the CIO Risk organization, including its infrastructure and personnel shortcomings, and inadequacies of its limits and controls on the Synthetic Credit Portfolio. The CIO Risk organization was not equipped to properly risk-manage the portfolio during the first quarter of 2012, and it performed ineffectively as the portfolio grew in size, complexity and riskiness during that period.

As the Firm’s Chief Financial Officer, Douglas Braunstein bears responsibility, in the Task Force’s view, for weaknesses in financial controls applicable to the Synthetic Credit Portfolio, as well as for the CIO Finance organization’s failure to have asked more questions or to have sought additional information about the evolution of the portfolio during the first quarter
of 2012.

While the task force takes aim at the top rungs of the firm in New York, the report largely centers on a breakdown at the chief investment office in London. The group was created to invest JPMorgan’s own money and offset potential losses across the bank’s disparate businesses. But a group of traders and executives in the group lost their way early last year.

In response to adverse moves in the markets and regulatory changes, the group made a series of aggressive derivatives trades. As these bets began to sour, the London team doubled down rather than exit the trade, according to the bank.

“The trading strategies that were designed in an effort to achieve the various priorities were poorly conceived and not fully understood” by Ms. Drew and others. The chief investment office, the report added, was “excessively optimistic” when discussing the positions with the firm’s senior management in New York.

The report portrays traders intent on “defending their positions,” even as those positions spun out of control.

Yet the architects of the trade are conspicuously absent from the report. Javier Martin-Artajo, a manager who oversaw the trading strategy from the bank’s London offices; Bruno Iksil, the trader known as the London Whale for placing the outsize bet; and Achilles Macris, the executive in charge of the international chief investment office; were not mentioned by name. The bank said British privacy laws prevented it from naming certain people in the London office.

The report did, however, reiterate earlier concerns about this group’s motivations.

“In the course of the task force’s ensuing work, it became aware of evidence – primarily in the form of electronic communications and taped conversations – that raised questions about the integrity of the marks,” the report said, adding that the bank restated its first-quarter results to reflect that the traders may have underestimated their losses by $459 million.

The Federal Bureau of Investigation is now examining whether the traders falsified records to hide the problems from executives in New York. The investigation is continuing.

This post has been revised to reflect the following correction:

Correction: January 16, 2013

An earlier version of this article referred incorrectly to a former leader of JPMorgan Chase’s chief investment office. The former executive, Ina R. Drew, is a woman.

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DealBook: F.B.I. Makes Insider Trading Arrests

Federal authorities are seeking to arrest Anthony R. Chiasson, co-founder of the Level Global hedge fund, the latest development in the the government’s aggressive investigation of insider trading.

Two others, including hedge fund manager Todd Newman, were arrested on Wednesday morning as part of the case, and the Federal Bureau of Investigation plans to arrest another person later in the day, said a person briefed on the matter.

Federal Bureau of Investigation agents went to Mr. Chiasson’s apartment in Manhattan to arrest him on Wednesday morning but he was not home, the person briefed on the matter said. He is said to be negotiating a surrender for later on Wednesday.

Mr. Chiasson founded Level Global with David Ganek in 2003. Both had previously worked at Steven Cohen’s hedge fund, SAC Capital Advisors.

Level Global shut down last year in the wake of a November 2010 raid by federal agents.

The United States attorney’s office in Manhattan, led by Preet S. Bharara, has won 50 insider trading convictions over the last two years, the most prominent being last year’s conviction of hedge fund titan Raj Rajaratnam.

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Reporter’s Notebook: U.S. Agents, an Aerial Snoop and Teams of Hackers

WHY are federal agents hobnobbing with hackers?

Defcon, a convention of computer hackers here, was crawling with them on Friday. They smiled, shook hands, handed out business cards, spoke on a panel called “Meet the Federal Agent 2.0” and were really, really nice.

Naturally, federal agents have been hanging out at hacker gatherings for years to snoop. “Cloak and dagger,” as one put it.

This time they came with another purpose: to schmooze, impress and, perhaps ultimately, lure. The United States Cyber Command, the Pentagon’s Internet defense arm, “has a work force issue,” said Daron Hartvigsen, special agent with the Air Force Office of Special Investigations. “We have needs that some in this community can solve. We need folks with skills.”

Government agencies especially need computer professionals with cybersecurity skills. At Defcon, these skills were in ample supply — and they can alternately thrill and scare. There were hackers and lockpickers here, problem solvers and troublemakers. There were attendees with mohawks and blue hair, and some with blue mohawks. One wore a cape. A few wore kilts. Most, whether out of fear or conceit, insisted on using their digital names rather than their real ones: LosT, alien, Abstract.

In their midst were Internet crime investigators representing the Army, Navy, Air Force and NASA. The F.B.I. set up a recruiting table at Black Hat, a related conference of security professionals earlier in the week. A National Security Agency official was to speak to next-generation hackers at a two-day event called Defcon Kids on Saturday.

For the federal agents, it seemed less an aggressive recruiting drive than a public diplomacy mission. They took pains to describe themselves as lovable hackers under their crew cuts.

Ryan Pittman, an ex-cop who now works computer crime cases in the Army’s criminal investigations division, said the convention was an opportunity to whittle away the federal agents’ image as “jackbooted thugs.” Ahmed Saleh, a computer crime investigator with NASA, described a job that might be appealing “if you’re a geek and you want to catch the bad guys.”

There seemed to be plenty of receptive hackers. Christine Banek, 29, a software programmer with plum-colored hair, sidled up to Mr. Saleh after the panel and asked if his agency was still hiring. She said she had applied online and had not heard back. “If they were offering, I would totally take it,” she said. Later, she suggested aloud that the government legalize marijuana. Positive drug tests generally disqualify a candidate from a law enforcement position.


It flies. It spies. It is the color of sunshine, and it has googly eyes.

Meet WASP, the Wireless Aerial Surveillance Platform, one of the star attractions of this year’s Black Hat conference.

It’s a remote-controlled plane with a computer in its belly that can fly up to 400 feet above the ground, snoop quietly on wireless networks below and attack one if it wants to. It can also pretend to be a GSM cellphone tower, eavesdropping on calls and text messages that pass through.

The WASP was built by Richard Perkins and Mike Tassey using hobby materials, including a Styrofoam plane body, a plastic propeller and foam tires, along with circuit boards and wires. The materials are all off the shelf, costing $6,190 — a fraction of the cost of a spy plane, with cyberweapons included.

Its creators eschew the term “spy plane.” “There’s a negative connotation to a spy plane,” Mr. Tassey said. “This was done in an attempt to prove a concept.”

What concept?

“That it can be done,” he said.

His sentiment perfectly embodied the ethos of Black Hat, a spirited gathering of technologists who sometimes make scary things to show that they can be made, and at other times break things to show how badly they need to be fixed.

The bird conjured by Mr. Perkins and Mr. Tassey is barely four feet long and becomes an imperceptible, quietly humming little creature when it hovers overhead. It could be deployed over, say, an office building to sniff out information going across its wireless network. Or if the office network is well secured, the plane could follow an employee on a trip to a neighborhood Starbucks.

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DealBook: FrontPoint to Shut Most Funds After Insider Charges

Steve Eisman, a star manager at FrontPoint, considered leaving in the wake of the allegations of insider trading.Daniel Acker/Bloomberg NewsSteve Eisman, a star manager at FrontPoint, considered leaving the firm in the wake of the allegations of insider trading.

FrontPoint Partners, once a multibillion-dollar hedge fund before it was battered by allegations of insider trading, will shut down most of its funds by the end of the month.

The decision to wind down and restructure its business is a surprising reversal of fortune for the hedge fund. Earlier this year, FrontPoint had appeared to have weathered the scandal when it raised $1 billion for a new fund. And in March, its co-chief executives, Dan Waters and Mike Kelly, announced that the firm had bought back majority ownership of itself from Morgan Stanley, concluding a long-delayed spinoff.

But the good news was short-lived as investors continued to flee the fund when the window for withdrawals opened earlier this month.

“We have received capital redemption requests from some of our clients and as always we will honor those requests,” FrontPoint said in a statement to The New York Times in response to questions. “These actions are affecting strategies differently at FrontPoint Partners and as a result we will be winding down select strategies.”

The firm declined to state how much money investors wanted back. But people who spoke to the fund’s executives say that FrontPoint was winding down most of its business.

Earlier on Thursday, a spokesman for the firm, Steve Bruce, had denied that the firm was shutting down.

FrontPoint is just one of several funds brought low by a widespread government crackdown on insider trading at hedge funds. Two funds, Level Global Investors and Loch Capital, shut down after raids by federal agents late last year linked to the broader investigation.

More broadly, FrontPoint’s move comes at a difficult time for the hedge fund industry, amid increased regulation and difficult markets. Some prominent managers like Stanley Druckenmiller, Chris Shumway and most recently Carl C. Icahn have left the field and manage their own money.

In many ways, the rise and fall of FrontPoint mirrors that of the industry itself. In late 2006, when owning a hedge fund was considered a smart way for banks to deploy capital, the firm was bought by Morgan Stanley for about $400 million.

Then, during the financial crisis, the hedge fund was lauded for the insight of one of its most colorful managers, Steve Eisman, who had placed a bet against the subprime mortgage market that earned him hundreds of millions and a major role in “The Big Short,” the best seller by Michael Lewis. Several other hedge fund managers, including John A. Paulson and the Harbinger Group founder Philip Falcone, also minted fortunes from their bets against the housing market.

But trouble began at FrontPoint in November last year when a French doctor was arrested by federal authorities and accused of leaking secret information about a clinical drug trial to an unnamed portfolio manager. It quickly became public that the portfolio manager was Joseph F. Skowron, a doctor who ran a health care portfolio at FrontPoint.

The firm, which managed about $7 billion at the time, placed Mr. Skowron on leave and terminated the entire health care team. Effort to reassure investors that Mr. Skowron’s fund was separate from the many others it ran failed. Clients withdrew $3.5 billion as they raced to the exits.

A long planned spinoff from Morgan Stanley — prompted by the Dodd-Frank financial overhaul — was delayed as result of the huge withdrawals and legal complications.

The tide seemed to turn in January, when the firm announced that a new fund that would lend money to midsize companies had raised $1 billion. At the time, Mr. Waters, one of the firm’s chief executives, indicated the firm’s transparency had paid off.

But weeks later, Mr. Eisman, FrontPoint’s star manager, told those close to him that he was considering leaving the firm, frustrated with the collateral damage his funds had suffered from the insider trading incident. Clients had withdrawn nearly $500 million from funds he managed, according to a person close to Mr. Eisman.

Last month, Mr. Skowron was formally charged by federal authorities, accused of conspiring to hide his role in a trading scheme that netted FrontPoint Partners more than $30 million. Mr. Skowron was leaked confidential tips about a drug trial by Yves M. Benhamou, a French doctor, who accepted envelopes stuffed with cash for the information.

Mr. Benhamou has pleaded guilty to insider trading and obstruction of justice.

FrontPoint declined to say which funds would be closed after the shakeout. The only fund they did indicate would remain open was the midsize lending fund, which has money committed for several years.

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Talking Business: In Prison for Taking a Liar Loan

Soon after that column ran, I received an e-mail from a man named Richard Engle, who informed me that I was wrong. There was, in fact, someone behind bars for what he’d supposedly done during the subprime bubble. It was his 48-year-old son, Charlie.

On Valentine’s Day, the elder Mr. Engle said, his son had entered a minimum-security prison in Beaver, W.Va., to begin serving a 21-month sentence for mortgage fraud. He then proceeded to tell me the tale of how federal agents nabbed his son — a tale he backed up with reams of documents and records that suggest, if nothing else, that when the federal government is truly motivated, there is no mountain it won’t move to prosecute someone it wants to nail. And it was definitely motivated to nail Charlie Engle.

Mr. Engle’s is a tale worth telling for a number of reasons, not the least of which is its punch line. Was Mr. Engle convicted of running a crooked subprime company? Was he a mortgage broker who trafficked in predatory loans? A Wall Street huckster who sold toxic assets?

No. Charlie Engle wasn’t a seller of bad mortgages. He was a borrower. And the “mortgage fraud” for which he was prosecuted was something that literally millions of Americans did during the subprime bubble. Supposedly, he lied on two liar loans.

“The Department of Justice has made prosecuting financial crimes, including mortgage fraud, a high priority,” said Neil H. MacBride, the United States attorney for the Eastern District of Virginia, in a statement. (Mr. MacBride, whose office prosecuted Mr. Engle, declined to be interviewed.)

Apparently, though, it’s only a high priority if the target is a borrower. Mr. Mozilo’s company made billions in profit, some of it on liar loans that he acknowledged at the time were likely to be fraudulent and which did untold damage to the economy. And he personally was paid hundreds of millions of dollars.  Though he agreed last year to a $67.5 million fine to settle fraud charges brought by the Securities and Exchange Commission, it was a small fraction of what he earned.  Otherwise, he walked.  Thus does the Justice Department display its priorities in the aftermath of the crisis.


It’s not just that Mr. Engle is the smallest of small fry that is bothersome about his prosecution. It is also the way the government went about building its case. Although Mr. Engle took out the two stated-income loans, as liar loans are more formally called, in late 2005 and early 2006, it wasn’t until three years later that his troubles began.

As a young man, Mr. Engle had been a serious drug addict, but after he got clean, he became an ultra-marathoner, one of the best in the world. In the fall of 2006, he and two other ultra-marathoners took on an almost unimaginable challenge: they ran across the Sahara Desert, something that had never been done before. The run took 111 days, and was documented in a film financed by Matt Damon, who served as executive producer and narrator. Mr. Engle received $30,000 for his participation.

The film, “Running the Sahara,” was released in the fall of 2008. Eventually, it caught the attention of Robert W. Nordlander, a special agent for the Internal Revenue Service. As Mr. Nordlander later told the grand jury, “Being the special agent that I am, I was wondering, how does a guy train for this because most people have to work from nine to five and it’s very difficult to train for this part-time.” (He also told the grand jurors that sometimes, when he sees somebody driving a Ferrari, he’ll check to see if they make enough money to afford it. When I called Mr. Nordlander and others at the I.R.S. to ask whether this was an appropriate way to choose subjects for criminal tax investigations, my questions were met with a stone wall of silence.)

Mr. Engle’s tax records showed that while his actual income was substantial, his taxable income was quite small, in part because he had a large tax-loss carry forward, due to a business deal he’d been involved in several years earlier. (Mr. Nordlander would later inform the grand jury only of his much lower taxable income, which made it seem more suspicious.) Still convinced that Mr. Engle must be hiding income, Mr. Nordlander did undercover surveillance and took “Dumpster dives” into Mr. Engle’s garbage. He mainly discovered that Mr. Engle lived modestly.

In March 2009, still unsatisfied, Mr. Nordlander persuaded his superiors to send an attractive female undercover agent, Ellen Burrows, to meet Mr. Engle and see if she could get him to say something incriminating. In the course of several flirtatious encounters, she asked him about his investments.

After acknowledging that he had been speculating in real estate during the bubble to help support his running, he said, according to Mr. Nordlander’s grand jury testimony, “I had a couple of good liar loans out there, you know, which my mortgage broker didn’t mind writing down, you know, that I was making four hundred thousand grand a year when he knew I wasn’t.”

Mr. Engle added, “Everybody was doing it because it was simply the way it was done. That doesn’t make me proud of the fact that I am at least a small part of the problem.”

Unbeknownst to Mr. Engle, Ms. Burrows was wearing a wire.


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