By Emily Flitter and Nate Raymond
NEW YORK (Reuters) - As lawyers for SAC Capital Advisors made final preparations on Friday to enter an expected guilty plea in the insider trading case against the hedge fund, a late-night filing in a related criminal case offered a close look at how one trail of inside information went cold just before it reached SAC founder Steven A. Cohen.
The filing, made in the insider trading case against SAC executive Michael Steinberg, offers one clue about why prosecutors have not filed criminal charges against Cohen personally despite making a case that the firm itself had violated the law. It provides details related to a key aspect necessary for proving any insider trading case: Did the person authorizing the trades knowingly base the trading decision on insider information?
SAC is expected later on Friday to plead guilty to securities fraud and wire fraud and pay $1.2 billion in fines and forfeiture. Although authorities have not charged Cohen with wrongdoing, prosecutors said they will continue to investigate potential wrongful trading by individuals at the one-time $15 billion hedge fund.
Prosecutors in the Steinberg case asked that the defense team for Steinberg, who was charged in March over alleged insider trading in computer company Dell Inc and chipmaker Nvidia Corp, be barred from introducing evidence of trading in those stocks by another top SAC lieutenant, Gabriel Plotkin, to avoid creating confusion for the jury.
In the filing, prosecutors said a similar rationale applies to their decision to not introduce evidence that Cohen also made trades in shares of Dell in the summer of 2008 after receiving the same email authorities allege prompted Steinberg to make trades using inside information.
Authorities note that neither Cohen nor Plotkin has been charged with wrongdoing in trading Dell shares because they were too removed from the alleged source of the inside information.
Steinberg's trial is slated to begin on November 18.
The prosecution's filing in the Steinberg case shows that the emails containing inside information about Dell's quarterly earnings in summer 2008 allegedly were seen by a number of people within SAC beyond Steinberg.
Plotkin is one of SAC's top consumer traders. His name previously surfaced in the wide-reaching investigation into insider trading at SAC, but he has never been accused of wrongdoing. His name appears in emails between Steinberg and Jon Horvath, a former SAC analyst who pleaded guilty in September 2012 to charges relating to his own Dell trades.
Prosecutors maintain Horvath, who reported to Steinberg and is expected to testify against him at the trial, received a tip about Dell that he knew was from an insider source and passed it on to Steinberg. Plotkin also received some of Horvath's emails and made his own trades in Dell on the same day in late August 2008, as did Steinberg and Horvath.
But in their filing late Thursday, prosecutors laid out an argument for the strong possibility that Plotkin didn't know the tip from Horvath came from a Dell insider. Even though he sold Dell shares on that crucial August day, prosecutors acknowledge several good reasons why Plotkin made his trades based on other motivations.
Cohen, prosecutors added, had been aligning his trades in Dell with Plotkin's, right up until the day he, Steinberg and Horvath made their dramatically large Dell trades. Plotkin's trades were smaller.
And now the catch: Cohen eventually received the email containing the insider tip from Horvath. But it was forwarded to him from a researcher who had received it from Plotkin. Plotkin, prosecutors said in the filing, is the point at which the knowledge that the tip was from an insider - essential for proving the trades broke securities laws - may have been lost.
Nevertheless, a source familiar with the investigation said the trading in Dell continues to intrigue investigators, along with other SAC trades still under investigation in shares of Gymboree and Weight Watchers International.
"Sometimes institutions can be blameworthy also," said U.S. Attorney Preet Bharara, who spoke at a legal conference several hours before SAC was expected to enter its historic guilty plea.
"It's true that there are some bad apples, but sometimes the barrel is rotten also," Bharara said.
Plotkin's lawyer did not immediately respond to a request for comment. Jonathan Gasthalter, a spokesman for SAC Capital, declined to comment.
PENDING ADMINISTRATIVE ACTION
In July, the U.S. Securities and Exchange Commission filed an administrative action saying Cohen failed to supervise his employees. The anticipated guilty plea by SAC, which the firm agreed to on Monday, will not resolve the pending administrative action against Cohen.
The firm's guilty plea is a blow to Cohen's image as one of the top stock traders in the hedge fund industry but will not disturb his plans to continue running SAC Capital as a family office that will manage and trade his estimated $9 billion in personal wealth.
Under the civil portion of the plea deal, the hedge fund will only have to pay $284 million, after getting credit for $616 million in settlements in related insider trading cases by the U.S. Securities and Exchange Commission.
Some of the other loose ends in the SAC investigation were starting to be tied up on Friday. Former securities analyst Sandeep Aggarwal pleaded guilty to leaking details about a potential partnership between Yahoo Inc and Microsoft Corp in 2009 to Richard Lee, an SAC Capital manager.
"I knew what I was doing was wrong, and I am extremely sorry for my conduct," Aggarwal, 40, told U.S. Magistrate Judge Ronald Ellis in Manhattan. He is scheduled to be sentenced in May.
Lee pleaded guilty in July and is cooperating with prosecutors. Aggarwal is the 76th defendant convicted since October 2009 in the government's broad crackdown on insider trading.
SAC has agreed to plead guilty to one count of wire fraud and four counts of securities fraud. The agreement came after the fund was indicted in July on insider trading charges in connection with offenses committed by several employees over more than decade.
Steinberg has pleaded not guilty to four counts of securities fraud and one count of conspiracy based on the trades, which he made in 2008 and 2009.
(Reporting By Emily Flitter and Nate Raymond; Additional reporting by Joseph Ax; Editing by Matthew Goldstein, Leslie Adler and Bernard Orr)