SEC Charges Hedge Fund Firm Sigma Capital with Insider Trading
The Securities and Exchange Commission today announced that New York-based hedge fund advisory firm Sigma Capital Management has agreed to pay nearly $14 million to settle charges that the firm engaged in insider trading based on nonpublic information obtained through one of its analysts about the quarterly earnings of Dell and Nvidia Corporation.
The SEC’s case, borne out of its ongoing investigation into expert networks and the trading activities of hedge funds, began last year with charges against several hedge fund managers and analysts including Jon Horvath, a former analyst at Sigma Capital. Horvath agreed to a settlement earlier this month in which he admitted liability.
In a complaint filed today along with the proposed settlement in federal court in Manhattan, the SEC additionally charged Sigma Capital in the insider trading scheme and named two affiliated hedge funds – Sigma Capital Associates and S.A.C. Select Fund – as relief defendants that unjustly benefited from Sigma Capital’s violations. S.A.C. Select Fund is an affiliate of S.A.C. Capital.
The SEC’s complaint alleges that Horvath provided Sigma Capital portfolio managers with nonpublic details about quarterly earnings at Dell and Nvidia after he learned them through a group of hedge fund analysts with whom he regularly communicated. Based on the confidential information, Sigma Capital traded Dell and Nvidia securities in advance of earnings announcements in 2008 and 2009 for $6.425 million in gains for its hedge fund affiliates.
Sigma Capital agreed to pay disgorgement of $6.425 million plus prejudgment interest of $1,094,161.92 and a penalty of $6.425 million.
“Quarterly revenues and profit margins are fundamental drivers of stock prices. By illegally obtaining these vital financial measures in advance of their public announcement, Sigma Capital secured a crystal ball revealing where the stock would likely be trading in the near future,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement. “However, the crystal ball failed to predict a costly settlement with the SEC.”
Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “Sigma Capital’s violations of the securities laws were blatant and recurring. The firm obtained key quarterly earnings information before it was public and exploited an unfair edge over the rest of the market to reap millions of dollars in unlawful gains.”
According to the SEC’s complaint, the key inside information that Horvath obtained about upcoming earnings announcements by Dell and Nvidia often differed significantly from the predictions of market analysts, who only had access to publicly available information. Based on this inside information, Sigma Capital traded Dell and Nvidia securities in advance of four quarterly earnings announcements and reaped more than $5.2 million for its hedge fund Sigma Capital Associates. Horvath’s inside information also enabled S.A.C. Select Fund to execute trades and avoid losses of more than $1 million.
The SEC’s complaint charges Sigma Capital with violating Section 17(a) of the Securities Act, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Sigma Capital is neither admitting nor denying the charges. The settlement, subject to court approval, also would permanently enjoin Sigma Capital from future violations of the antifraud provisions of the federal securities laws.
The SEC’s investigation, which is continuing, has been conducted by Joseph Sansone, Daniel Marcus, and Stephen Larson – members of the SEC’s Market Abuse Unit in New York – and Matthew Watkins, Justin Smith, Neil Hendelman, Diego Brucculeri, and James D’Avino of the New York Regional Office. It has been supervised by Sanjay Wadhwa. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.