Manhattan U.S. Attorney Preet Bharara said his office agreed not to prosecute Diamondback for the actions of two former employees, Todd Newman, a former portfolio manager, and Jesse Tortora, a former analyst. In a complaint filed last week, prosecutors said the pair and five other men were part of a “criminal club” of fund managers and analysts who swapped illegal tips.
Newman, who began working at Diamondback in March 2006, was charged with conspiracy to commit securities fraud and securities fraud in the criminal complaint filed by Bharara’s office on Jan. 18. Tortora has pleaded guilty and is cooperating with the U.S., Bharara said. Newman, who hasn’t entered a plea, was released on $3 million bond.
“The misconduct under investigation did not, and does not, extend beyond the statement of facts and was not known by the firm’s co-founders,” assistant U.S. attorneys Antonia Apps and David Leibowitz said in court papers.
A lawyer hired by Diamondback concluded after an investigation that certain trades by Newman and Tortora in Dell and Nvidia resulted from material nonpublic information they received from an unidentified expert-networking firm, prosecutors said. The external probe found “no evidence that either the conduct or the improper information” was known by the firm’s co-founders, according to prosecutors.
Diamondback in late 2009 instructed so-called expert- networking firms it used not to permit meetings or conference calls with fund employees if the consultants were employed by public companies, Bharara’s office said.
Diamondback today separately agreed to resolve a Jan. 18 Securities and Exchange Commission lawsuit over trades made in 2008 and 2009 by the former employees, the SEC said in a statement.
The SEC filed claims against Diamondback, Newman and Tortora last week as part of a wider insider-trading case that involved five different hedge funds and investment firms. The agency claimed Newman learned inside information about Dell’s earnings in 2008 from Tortora.
Newman made $3.8 million in illegal profits for his hedge fund by trading on the information, according to the complaint filed in U.S. District Court in Manhattan.
Diamondback, based in Stamford, Connecticut, manages about $2.5 billion, compared with about $5.8 billion in November 2010. Investors pulled their money after the hedge fund’s offices were raided by the Federal Bureau of Investigation that month.
“We are gratified finally to have reached closure on the government proceedings, and deeply regret the difficulties caused to our investors during the last 14 months,” Diamondback said today in a letter to clients regarding the SEC.
Diamondback said the costs of the settlement -- a $3 million fine and surrender of $6 million in ill-gotten gains, according to the SEC -- won’t be borne by investors and won’t affect operations. The accord requires court approval.
“We believe that the proposed settlement appropriately sanctions the misconduct while giving due credit to Diamondback for its substantial assistance in the government’s investigation and the pending actions against former employees and their co- defendants,” George Canellos, head of the SEC’s regional office in New York, said in a statement.
Expert-networking firms connect investors with employees of public companies who purportedly provide them with insight into specific markets. Prosecutors said that sometimes material, nonpublic information was passed during consultations and conference calls.
The case is SEC v. Adondakis, 12-cv-409, U.S. District Court, Southern District of New York (Manhattan).