Witnesses in Trading Trial Give Peek at SAC’s Operations

The insider trading trial of Michael S. Steinberg, a former senior employee of SAC Capital Advisors, offered a glimpse inside the wildly successful hedge fund on Thursday as the first two witnesses took the stand.

Daniel Berkowitz, SAC’s chief financial officer and the government’s first witness, told the 12-member jury that portfolio managers were encouraged to come up with good ideas and were rewarded special “Cohen tag bonuses” — named for the hedge fund’s founder, Steven A. Cohen — for ideas that translated into windfall gains.

Mr. Berkowitz said that if Mr. Cohen liked the ideas, they “would receive a bonus, depending on how big the trade was.”

As one of the 100 portfolio managers at the fund, Mr. Steinberg oversaw a team of five analysts who provided research and data for his investment ideas, Mr. Berkowitz said.

The second witness, Jesse Tortora, a former technology stock analyst at another hedge fund, Diamondback Capital Management, testified that he and one of Mr. Steinberg’s analysts, Jon Horvath, formed a circle of friends and analysts at other firms to share tips to give their portfolio managers the edge they demanded.

Mr. Steinberg has been accused of using confidential information to trade the technology stocks Dell and Nvidia, gaining over $1 million in returns for SAC. His trial is at the heart of a decade-long government investigation into the firm that has led to criminal charges against eight former SAC employees, six of whom have pleaded guilty to securities fraud.

This month, SAC agreed to pay $1.2 billion and plead guilty to charges of insider trading violations. Mr. Steinberg is the first former employee to stand trial. And on Thursday, Sol Kumin, SAC’s chief operating officer, announced that he was resigning, underscoring the firm’s transformation from one of the most powerful hedge funds on Wall Street to a symbol of corporate crime.

Both witnesses took the stand at the federal courthouse in Lower Manhattan, speaking to a gallery nearly filled with friends and family of Mr. Steinberg and members of the news media. The assistant United States attorney Antonia M. Apps began to lay the foundation for what she called a “corrupt conspiracy” that Mr. Steinberg and Mr. Horvath tapped into.

Much of the government’s case against Mr. Steinberg will turn on testimony from Mr. Horvath, who obtained and shared confidential information through a close-knit network of friends and other hedge fund analysts that included Mr. Tortora.

Mr. Tortora pleaded guilty to insider trading and conspiracy to commit insider trading in April 2011 and is cooperating with the government in exchange for a lighter sentence. He told the jury that his sentence would be decided after Mr. Steinberg’s trial.

In their opening arguments on Wednesday, Mr. Steinberg’s lawyers contended that Mr. Horvath, who has also pleaded guilty to insider trading, had rewritten the facts to strike a deal similar to Mr. Tortora’s. “He needed to trade his freedom for that of another,” Barry H. Berke, Mr. Steinberg’s lead lawyer, said.

The government argued that, when pushed to provide “edgy proprietary information” of the kind that would satisfy Mr. Steinberg, Mr. Horvath sought confidential and market-moving information.

Under questioning by Mr. Berke, Mr. Berkowitz of SAC described what sources analysts used for their research. “They meet with companies, suppliers, vendors, and other market participants,” he said. Mr. Berke then asked whether “proprietary company specific analysis” was legitimate and proper. “Yes,” Mr. Berkowitz replied.

Mr. Tortora told the jury that under pressure from a verbally abusive boss at Diamondback for a “read” on certain companies and information with an “edge,” he turned to his network. He described this as information that “someone else does not have that is unique.”

When asked why he engaged in insider trading, Mr. Tortora said, “It allowed us to be more effective, more efficient and more profitable than working alone.”

Among a dozen or so exhibits shown to the jury was an email from Mr. Tortora to Mr. Horvath and their network of friends.

“Enjoy. Your perf will now go up 100% in 09 and your boss will love you,” Mr. Tortora wrote, referring to the performance of their portfolio after trading on the sensitive information the group shared.

While the defense team made painstaking efforts over the nearly two-day jury selection process to make sure that jurors selected would have little knowledge of or reference to Mr. Cohen or the settlements with the firm and other former employees, his name came up several times during the day.

But it was not until Mr. Tortora told the jury that he and Mr. Horvath shared details about their bosses and referred to Mr. Steinberg as “Steven Cohen’s right-hand man,” that Mr. Steinberg’s lawyer called an objection.