Former Diamondback Capital Management LLC fund manager Todd Newman deserves a prison term of as long as 6 1/2 years for his role in a $72 million insider- trading scheme, prosecutors said.
Newman, 48, was convicted by a federal jury in Manhattan in December of one count of conspiracy to commit securities fraud and four counts of securities fraud for a scheme to trade on Dell Inc. (DELL:US) and Nvidia Corp. (NVDA:US) using illicit tips provided by their analysts. His sentencing is scheduled for May 2.
Prosecutors said Newman should get the recommended term of 63 months to 78 months under U.S. sentencing guidelines, arguing he was an integral member of a group of as many as 10 portfolio managers, analysts and insiders at technology companies who swapped inside information.
“Newman was a central and active participant in a large- scale conspiracy to exchange and trade on inside information about multiple stocks,” assistant U.S. attorneys Antonia M. Apps, Richard C. Tarlowe and John T. Zach said in the filing.
Diamondback, which was raided by the FBI in November 2010 as part of the federal investigation of insider trading at hedge funds, is seeking a total of $39 million from Newman under the federal Mandatory Victims Restitution Act, saying it’s a victim of his crimes.
The fund said after the raid that there was a “massive wave” of investor redemption of about $1.3 billion and that it lost at least $26 million, or the 2 percent management fees it would have earned on those funds during the next year.
“These redemptions were a direct and foreseeable result of the negative publicity faced by Diamondback due to Newman’s actions,” Peter Neiman, a partner at Wilmer Hale LLP who is representing the Stamford, Connecticut-based fund, said in a letter to prosecutors.
Diamondback avoided prosecution and agreed to pay $9 million to settle a related suit brought by the U.S. Securities and Exchange Commission stemming from Newman’s case. The fund announced it would close in December after clients pulled money as a result of publicity from Newman’s case.
The restitution sought by Diamondback includes the $10.2 million in legal fees tied to the government’s criminal investigation, the $2.5 million it paid Newman in compensation and the $2.3 million spent to collect at least 2 million documents the U.S. sought as part of the insider-trading probe. The fund said it also spent more than $746,000 to pay for lawyers for employees and witnesses as part of Newman’s case.
Prosecutors said that Diamondback hasn’t established that it’s entitled to restitution for loss of its management fees. Judge Richard Sullivan will have to make a final determination.
Like Diamondback, other firms have sought such restitution from their former employees after insider-trading prosecutions. Goldman Sachs Group Inc. obtained a $6.2 million restitution payment from former director Rajat Gupta. Morgan Stanley won a $10.2 million judgment for insider trading by ex-FrontPoint Partners LLC fund manager Joseph F. “Chip” Skowron. Both Skowron and Gupta were convicted at trial and are appealing their cases and the restitution.
Newman’s lawyers have asked for an unspecified lesser term for their client, arguing that he was at least four steps removed from those who gathered the illegal tips. Newman contends the two stocks at issue were among the hundreds of securities he traded during this time period. Newman’s analyst, Jesse Tortora, pleaded guilty and testified against him at the trial.
John Nathanson, a lawyer for Newman, declined to comment on the government’s memo.
Prosecutors said the evidence shows Newman knew that the information was illicit and that other fund managers were receiving the tips, including Level Global Investors LP co- founder Anthony Chiasson and SAC Capital Partners LP’s Michael Steinberg.
Newman authorized the fund to pay one source, Sandy Goyal, $175,000 to funnel nonpublic information he received from a Dell insider and earned more than $4 million from his insider trading, prosecutors said.
“The fraudulent scheme was far more extensive than simply illicit trading in two stocks,” prosecutors said. “The sophistication of the insider trading scheme in this case lay in the fact that the portfolio managers could obtain the benefit of having access to a network of company insiders without having to communicate directly.”
Chiasson was convicted along with Newman in December, after a trial in federal court in Manhattan. Steinberg was charged by the U.S. last month with conspiracy and securities fraud. He pleaded not guilty to the charges.
While Newman argued that he traded hundreds of stocks each year and the government only proved at trial insider trading in two just stocks, prosecutors said the evidence shows information on at least a dozen stocks was funneled to Newman and others in the scheme and that at least 10 people were part of the insider trading.
Six of those charged in the case have pleaded guilty and agreed to cooperate with the U.S.
The case is U.S. v. Newman, 1:12-cr-00121, U.S. District Court, Southern District of New York (Manhattan).
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