Looks can be deceiving when it comes to assessing the U.S. criminal investigation of SAC Capital Advisors LP founder Steven A. Cohen.

Federal prosecutors have enjoyed a steady drumbeat of indictments over the past few years, punctuated by headline-grabbing 6 a.m. knocks at the door as Federal Bureau of Investigation agents arrest the latest member of the inner circle of the $15 billion hedge fund.

The insider trading indictment last week of SAC fund manager Michael Steinberg, a 16-year veteran of the firm, involved the most senior member of Cohen’s firm charged so far. The splash of his Good Friday arrest followed the charges last year of SAC portfolio manager Mathew Martoma, bringing to nine the number of current or former SAC traders or analysts linked to illegal trades.

That’s a sizable universe of people who could potentially incriminate Cohen. Yet the closest prosecutors have gotten so far to implicating Cohen himself occurred in Martoma’s case, which involved an alleged 20-minute conversation Martoma had with Cohen about health stocks. The firm netted $276 million on those stocks, trading on illegal tips Martoma got, according to prosecutors. But no evidence was put forth that Cohen, who denies any wrongdoing, knew the tips were improperly obtained.

In Steinberg’s case, the evidence about illegal trades in technology stocks was even more indirect. The judge in charge of that case said Steinberg’s indictment, echoing some of the charges against other SAC employees, didn’t show much new evidence of malfeasance at the hedge fund.

Civil Case?

Following a $616 million U.S. Securities and Exchange Commission settlement with SAC last month over alleged illegal trades, it may well be that the government won’t seek to go much higher up SAC’s ladder and might have to settle for a civil case against Cohen for not properly supervising his subordinates.

“These seem to be trades that didn’t have Cohen’s direct involvement,” Bradley Simon, a former federal prosecutor now in private practice in New York.

It appears increasingly unlikely that Cohen would be charged, he said. Additionally, the statute of limitations for securities fraud is five years, which means the U.S. is running out of time to file new charges based on some of the trades at issue. The U.S. needs to act on the health trade by mid-July.

Picasso, Hamptons

Cohen may be coming to the same conclusion about the unlikelihood of criminal charges based on his recent purchases of property in the Hamptons for $60 million and a Pablo Picasso painting for $155 million, Simon said.

Those purchases combined with his willingness to lay down almost two-thirds of a billion dollars to settle with the SEC, Simon said, may show Cohen sees the criminal threat as being behind him. Cohen wouldn’t have agreed to the SEC deal if he thought he faces arrest in an insider case, Simon said.

“Could it be that he’s been told that he won’t get charged?” the lawyer asked. “He must feel pretty confident.”

Still, the SEC has said that its investigation is continuing, and the Justice Department has made no announcement that its five-years of scrutinizing hedge funds led by SAC was winding down.

Anthony Sabino, a professor of law at the Tobin School of Business at St. John’s University in New York, said the investigation by Manhattan U.S. Attorney Preet Bharara and the New York FBI will not let up.

‘Highest Echelon’

“They’re tightening the noose around the highest echelon at SAC,” Sabino said. “This is pretty clearly part of a pre-conceived strategy” of winning convictions against lesser executives and building cases against “the higher-ups.”

“They’re systematically decimating key personnel at SAC,” said Sabino. “If they’ve arrested a fund manager, how long until they bring charges at the highest echelon?”

Cohen, 56, hasn’t been charged or sued by the government. Jonathan Gasthalter, a spokesman for Stamford, Connecticut-based SAC, and Ellen Davis, a spokeswoman for Bharara, declined to comment.

Steinberg, who turns 41 this week, was taken into custody March 29 at his Manhattan home when FBI agents appeared at his door at 6 a.m. The most senior SAC official to be charged, he was indicted by a federal grand jury March 28 on five counts of conspiracy and securities fraud. Part of SAC’s Sigma Capital Management unit, he has been with SAC since 1997.

Steinberg traded on insider tips obtained from convicted SAC technology analyst Jon Horvath, according to his indictment.

Twenty Years

One of 15 SAC portfolio managers handling technology, media and telecommunications stocks before he was placed on leave last year, a person familiar with the matter said, Steinberg faces as long as 20 years in prison if convicted.

U.S. District Judge Richard Sullivan in Manhattan, who presides over many of the SAC-related cases, ruled in December that Steinberg was an uncharged co-conspirator in a $72 million insider trading conspiracy involving Level Global Investors LP co-founder Anthony Chiasson, ex-Diamondback Capital Management LLC portfolio manager Todd Newman.

“Steinberg was another Wall Street insider who fed off a corrupt grapevine of proprietary and confidential information,” Bharara said last week.

Steinberg pleaded not guilty during a half-hour court hearing March 29. Dressed in a dark sweater, slacks and handcuffs, Steinberg looked straight ahead during the 30-minute hearing, where his bail was set at $3 million and his travel was limited to New York, Connecticut, Florida and California. He was to be released on $100,000 bond.

Handcuffed Steinberg

During the court appearance, Steinberg said “yes” three times when asked if he understood his rights and “not guilty, your honor” when asked for his plea.

Assistant U.S. Attorney Antonia Apps said the case is based “largely” on cooperator testimony. While Steinberg was caught “on a handful” of wiretaps, prosecutors don’t expect to introduce them at trial, Apps said.

This case “involves a lot of paper, a lot of information over a long period of time,” Sullivan said. It focuses on trades from 2008 and 2009 and may not generate many new details about SAC trading, he said.

“Much of the information” has already “been publicly available,” the judge said. The next hearing was set for May 3.

‘Judge Shopping’

In court last week, defense lawyer Barry Berke suggested prosecutors may be involved in “judge shopping” by bringing the case as part of earlier charges against others. By using such a superseding indictment, prosecutors ensured the case was assigned to Sullivan instead of another judge, Berke said.

Sullivan has handed down severe sentences in financial crime cases, sending ex-fund manager James Nicholson to prison for 40 years, former Galleon Group LLC trader Zvi Goffer for ten years and technology investor Alberto Vilar for nine years.

He also issued a ruling in an earlier insider case that defense lawyers claimed lessens the government’s burden of proof. Two other judges in the same court have ruled differently.

Sullivan said at the hearing March 29 that the “odds” were that he would retain the Steinberg case.

“Mr. Steinberg -- don’t believe Mr. Berke,” the judge said in court. “I’m not as bad as he says.”

Sabino’s assessment that prosecutors are still actively pursuing SAC received a boost last month when an SEC complaint helped reveal that another senior SAC employee is tied to the investigation.

Gabriel Plotkin

According to internal e-mails and two people familiar with the matter, Steinberg and SAC fund manager Gabriel Plotkin both were recipients of inside information passed to them by Horvath, the convicted SAC analyst. Plotkin hasn’t been accused of wrongdoing.

Steinberg is charged with being part of a conspiracy that began in late 2007 and continued until 2009. The U.S. said he received and traded on illegal tips on Dell Inc. and Nvidia Corp.

The SEC, which filed a parallel lawsuit against Steinberg last week, has said Horvath funneled nonpublic information on technology stocks to two unidentified portfolio managers at Cohen’s hedge fund. Both men then traded on the information, reaping more than $6 million for SAC Capital units.

The men were Steinberg and Plotkin, according to the SAC e- mails. The e-mails were also cited in Steinberg’s indictment.

In November, the U.S. indicted Martoma, a former fund manager for SAC’s CR Intrinsic Investors unit, in what prosecutors called the biggest insider-trading scheme in history.

Drug Stocks

Bharara said Martoma helped SAC make $276 million on illegal tips about an Alzheimer’s drug by trading in shares of Elan Corp. and Wyeth LLC. He has pleaded not guilty to the charges and is awaiting trial.

The indictment of Steinberg, meanwhile, brings prosecutors a step closer to Cohen. He has had the longest tenure at SAC of those the U.S. has tied to its insider-trading probe.

Berke, Steinberg’s lawyer, rejected the charges and said his client traded “based on detailed analysis as well as information that he understood had been properly obtained.”

George Venizelos, head of the FBI’s New York office, took a different tack, alleging in a statement March 29 that Steinberg’s “research was nothing more than well-timed tips from an extensive network of well-sourced analysts.”

SAC spokesman Gasthalter said last week Steinberg “has conducted himself professionally and ethically during his long tenure at the firm.”

SEC Settlement

Simon, the former federal prosecutor, said that the SEC’s record $616 million settlement with SAC, and the hedge fund’s willingness to pay it, may indicate that Cohen sees the probe as coming to an end.

The settlement, however, requires a judge’s approval, and that may not come as easily as the parties would like.

At a hearing about the largest piece of the settlement, $602 million, U.S. District Judge Victor Marrero in Manhattan last week raised questions over whether the hedge fund should be allowed to avoid admitting it did anything wrong.

His concerns echoed another Manhattan federal judge, U.S. District Judge Jed Rakoff, who has repeatedly expressed reluctance to rubber stamp SEC deals where the offending financial institution is allowed to avoid admitting wrongdoing.

The SEC accord would resolve claims that SAC Capital and CR Intrinsic profited from alleged illegal tips received by Martoma. A related $14 million SEC settlement with the hedge fund is before another judge.

Technology Stocks

As part of the March 15 SEC settlement proposal, the regulator sued SAC subsidiary Sigma, describing Horvath’s passing of inside information and expanding on what the U.S. had previously said about insider trading at SAC.

Horvath, who pleaded guilty in September, admitted he provided illegal tips to his portfolio manager, who then traded on them. His co-conspirators obtained material nonpublic information on Dell in August 2008 and about Nvidia in May 2009 from insiders at the two technology companies, he said.

While Horvath never named Steinberg in court, prosecutors alleged during Chiasson and Newman’s trial that Steinberg was the recipient of Horvath’s tips. The tips earned Horvath’s hedge fund manager about $1.4 million, prosecutors said. The SEC said in the March 15 complaint that the analyst’s tips on technology stocks reaped the fund more than $6 million.

Horvath, who worked at Sigma from 2006 to 2011, is cooperating with the insider-trading investigation by Bharara’s office and the FBI in New York. Steve Peikin, his lawyer, declined to comment.

During Plea

Horvath told the judge during his plea that he “agreed to obtain and share information about public companies.”

Jesse Tortora, a former analyst who worked for Diamondback’s Newman, provided SAC’s Horvath with the tips on Dell, the Round Rock, Texas-based computer maker, and Danny Kuo, a former analyst at Whittier Trust Co., obtained information on Santa Clara, California-based graphics processor maker Nvidia from Hyung Lim, then an Nvidia employee, according to the government filings last week.

“In each instance I provided the information to the portfolio manager I worked for and we executed trades in the stocks based on that information,” Horvath told Sullivan, who presides over his case as well.

During Chiasson and Newman’s trial, prosecutors provided evidence including SAC e-mails that they said showed Steinberg’s state of mind about the information he received from Horvath.

Dell Earnings

Two days before Dell was set to report second-quarter 2008 earnings, Horvath e-mailed Steinberg and Plotkin to warn that the computer maker would miss earnings estimates.

“I have a 2nd hand read from someone at the company,” Horvath said in the Aug. 26 e-mail, which provided details on gross margins, expenditures and revenue. “Please keep to yourself as obviously not well known.”

Steinberg replied, “Yes normally we would never divulge data like this, so please be discreet. Thanks.”

The messages exchanged among Horvath, Steinberg and Plotkin show Steinberg consulted with Cohen about the August 2008 Dell trade.

“Guys, I was talking to Steve about Dell earlier today and he asked me to get the two of you to compare notes before the print, as we are on opposite sides of this one,” Steinberg wrote to Horvath and Plotkin.

Prosecutors said Steinberg shorted Dell securities based on Horvath’s information, earning the hedge fund about $1 million. Plotkin is one of 10 portfolio managers at Sigma focusing on consumer stocks. He joined SAC in 2006 and is among the firm’s top portfolio managers, overseeing more than $1 billion, according to a person with knowledge of the firm.

E-Mails

The e-mails were made public as part of the month long trial of Chiasson and Newman, who were convicted in December by a federal jury in Manhattan. They face as long as 20 years in prison when they are sentenced by Sullivan later this year.

Sullivan concluded in December that e-mail and instant messages he reviewed showed that Steinberg could have known information he used for trades came from insiders.

“The e-mails that were relayed to Steinberg do indicate to me that he understands the source of the information that he’s getting and he’s trading on it,” Sullivan wrote. “All of that indicates this is inside information from the company that’s not available anywhere else.”

Horvath was one of eight analysts and portfolio managers charged in January 2012 with being part of what Bharara described as “a tight-knit circle of greed” whose members trafficked in confidential information from 2007 to 2009.

Six of those charged in the case have pleaded guilty and agreed to cooperate with the U.S. Horvath pleaded guilty just weeks before he was set to go on trial with Chiasson and Newman.

David Ganek

Sullivan ruled during Chiasson and Newman’s trial that David Ganek, a Level Global co-founder, was also an uncharged co-conspirator in the case. Both Chiasson and Ganek worked at SAC Capital before starting Level Global.

Ganek hasn’t been charged with any crime. Ganek’s attorney, John Carroll, said in December when asked about Sullivan’s ruling that “both the U.S. attorney and the SEC have been investigating this case for two years and neither has found reason to charge my client.”

Two others who were charged with being part of the scheme pleaded guilty and testified at the trial as prosecution witnesses.

Tortora and Spyridon “Sam” Adondakis, who once worked as an analyst for Chiasson, described for the jury how they swapped nonpublic information obtained from insiders at technology companies. They said they then passed on that information to their portfolio managers who traded on the illegal tips. Kuo, formerly of Whittier, also pleaded guilty and is cooperating with the U.S.

‘Down Low’

At a December hearing outside the jury’s presence during Chiasson and Newman’s trial, Sullivan read aloud an e-mail from Horvath to Steinberg that mentions “JT,” which prosecutors said was a reference to Jesse Tortora.

“P.S. Keep the Dell stuff, especially on the down low,” Horvath said in the e-mail, “because JT asked me specifically to be extra sensitive with this information.”

Prosecutors told the judge that Steinberg took a short position in Dell stock, betting that it would drop, “in a matter of minutes” after receiving Horvath’s message.

“Why would you need to keep this on the ‘down low’ if this stuff is from investor relations?” Sullivan said, adding: “That doesn’t look good.”

The case is U.S. v. Steinberg, 12-00121, U.S. District Court, Southern District of New York (Manhattan).