Diamondback Capital Management LLC, one of the hedge funds raided by the FBI in 2010, is seeking $39 million in restitution from former fund manager Todd Newman, saying it’s a victim of his insider-trading scheme.
Newman, 48, was convicted of conspiracy and securities fraud by a federal jury in New York in December. Prosecutors said he was part of a group of fund managers, analysts and insiders at technology companies who swapped inside information in a scheme that reaped $72 million in illicit profits.
The hedge fund, which closed in December, is asking for the restitution, claiming its goodwill and reputation were “tarnished,” Prosecutors called the request “unprecedented.”
The loss of a $26 million management fee and investor redemptions are “direct damage Newman’s criminal conduct inflicted,” according to Stamford, Connecticut-based Diamondback.
“It is impossible to return Diamondback fully to the position it was in prior to Nov. 22, 2010, when Todd Newman’s insider-trading scheme led to an FBI raid on Diamondback’s offices,” said Peter Neiman, a partner at Wilmer Hale LLP who is representing the fund. “Diamondback is also entitled to recover for the direct damage Newman’s criminal conduct inflicted on its goodwill and business reputation.”
Newman is scheduled to be sentenced May 2 by U.S. District Court Judge Richard Sullivan in Manhattan. Sullivan will rule separately on the restitution request, which the fund is making under the federal Mandatory Victims Restitution Act, Neiman said.
Prosecutors said April 26 that Diamondback’s request was “unprecedented,” saying the fund hadn’t explained how it was foreseeable to Newman at the time he was committing his crimes that, if the offenses were detected, it would lead to a large- scale withdrawal of investor funds.
Vickram David, head of investor relations at Diamondback, said in an affidavit to the court that before the raids, the fund had been growing rapidly -- with the prospect of having as much as $8 billion under management. The searches triggered a “massive wave” of investor redemption of about $1.3 billion, more than 30 percent of the fund’s assets under management on Feb. 15, 2011
“Based on my regular communications with investors at that time, it is clear to me that the withdrawals were entirely driven by the dramatic events,” David said.
“Investor reaction was immediate,” he said. “Over the week following the search, I spoke to nearly all of our investors. Uniformly, they expressed enormous concern at the suggestion in the search warrant (and in related press stories) that Newman had engaged in insider trading. Many investors immediately requested their money back.”
Newman was convicted of an insider trading in December in a scheme to trade on Dell Inc. (DELL:US) and Nvidia Corp. (NVDA:US) using illicit tips provided by analysts and insiders at technology companies who swapped inside information.
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 (MS:US) 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 orders.
Prosecutors said in court filings that Diamondback’s request was unique because it seeks restitution for “massive investor redemptions,” which Morgan Stanley and other firms whose employees were convicted of insider trading haven’t sought.
Diamondback said in December it was closing, saying it had received requests from investors to withdraw about $520 million, or 26 percent, of its assets.
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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