Galleon Arrests Reduced Inside Tips, Ex-Analyst Testifies

Arrests tied to the insider-trading case involving Galleon Group LLC made obtaining illegal tips harder and often less specific, an analyst for former Diamondback Capital Management LLC fund manager Todd Newman testified.

“It certainly changed things,” Jesse Tortora testified today at Newman’s insider-trading trial in New York. “It made it more difficult. Everybody was anxious. Everybody was nervous. Information became less frequent and less specific. People were a little bit reluctant to talk to each other.”

Newman is on trial in federal court with Level Global Investors LP co-founder Anthony Chiasson. They are charged with using a “corrupt chain” of insiders at public companies to make more than $70 million for their funds by trading on illegal tips about Dell Inc. (DELL) and Nvidia Corp. (NVDA) The men pleaded not guilty to securities fraud and conspiracy. The most serious count of securities fraud carries a maximum term of 20 years in prison.

Tortora, who worked for Newman from 2007 to 2010, is the government’s first witness. He has told how he obtained nonpublic information from company insiders and passed it to Newman and his friends. Tortora said Newman paid as much as $2.25 million in 2008 and only about $40,000 in 2010, the year he left the firm.

Rajaratnam Arrest

After Galleon’s co-founder, Raj Rajaratnam, was arrested in October 2009, Diamondback instituted a policy forbidding its employees to speak to expert-networking consultants, Tortora testified.

Such firms connect investors with employees of public companies who purportedly provide them with insight into specific markets. The government has alleged that expert networkers passed nonpublic information to fund managers and analysts in return for fees.

Tortora testified that he persuaded Newman to hire his friend Scott Kanowitz to create a model to track personal computer sales for companies like Dell and Hewlett-Packard Co.

Newman grew so concerned after of Rajaratnam’s arrest that he read the criminal complaint against Rajaratnam, Tortora said.

Tortora said the Rajaratnam case included allegations of insider trading in stocks including those of a computer company based in Round Rock, Texas, which Tortora said he and Newman concluded was Dell.

Boston Fund

The government also referred to a hedge fund in Boston, which they thought was Loch Capital Management LLC, he said. Tortora said Newman was friendly with the firm’s founders.

Tortora said he and Newman had a telephone conversation days after the arrests.

“Todd expressed concern about both of these, because we’d traded with Dell and he was close to a hedge fund in Boston, Loch Capital,” Tortora told jurors.

“In a subsequent conversation, he said he’d pulled his trading records in Dell in the quarters mentioned,” Tortora said. “He said he felt better because he’d lost money and said, ‘We don’t have to worry about it anyway, because we used Scott Kanowitz in the trade.’”

Tortora said not being able to provide Newman with nonpublic information renewed friction between the two men.

“I wasn’t able to do what I’d been doing for him,” Tortora said. “I couldn’t get the information and what I got was less specific,” he said. “The only time I knew that Todd Newman was happy was when I would give Todd Newman information. I got tired of not knowing which Todd I was working for, of being a mindless data jockey.”

‘Push Blame’

He said the two had a screaming argument in April 2010, after which he decided to leave Diamondback. Tortora said he agreed to cooperate with the Federal Bureau of Investigation after agents came to his parent’s home in Florida to speak to him in November 2010.

Stephen Fishbein, a lawyer for Newman, told the jury in opening statements on Nov. 13 that Tortora fabricated Newman’s involvement in the insider-trading scheme in retaliation for the firing and in order to “push the blame upon Todd Newman.”

In cross-examination today, Fishbein said Tortora had been failing in his work as an analyst months before the Galleon arrests. Tortora said it was as a result of not being able to obtain information that Newman sought.

“Isn’t it true you understood that your ticket to freedom was to give evidence against Todd Newman?” Fishbein asked.

“No, that’s untrue,” Tortora said.

FBI Recordings

Fishbein said Tortora made recordings for the FBI of friends including co-conspirator Danny Kuo, a former analyst at Whittier Trust Co., a South Pasadena, California-based wealth- management company. In a December 2010 telephone call Tortora recorded for the FBI, he told Kuo that the government wanted to make Newman “the fall guy,” Fishbein said.

Tortora testified he was only following a script suggested by FBI agents to see what Kuo would say about the scheme.

“From my memory, when I spoke to Danny Kuo, I was basically to tell Danny that Newman was going to be the fall guy and that the feds were pointing the finger at Newman and that they only wanted my help,” he said. “It was a fictional account they instructed me to make up for Danny Kuo.”

“Didn’t you say ‘my only saving grace is that they want me to help them with the investigation on Todd’?” Fishbein asked.

“Mr. Fishbein, I don’t recall,” Tortora replied.

Tortora E-Mails

Fishbein also confronted Tortora with dozens of e-mails the analyst sent to Newman during his time at Diamondback, which Tortora had described as nonpublic information about Dell and Nvidia obtained through his friends. The defense lawyer highlighted the fact that some electronic messages also included publicly available information or information in which the source wasn’t identified.

“Is that because you were protective of your sources?” Fishbein asked.

“Oh no,” Tortora said. “I told Todd everything.”

Of the eight people charged in the case, six pleaded guilty to insider trading, including Tortora; Spyridon “Sam” Adondakis, an analyst at New York-based Level Global; Kuo, and Sandeep “Sandy” Goyal, a former Dell employee. Four members of the scheme will testify for the government, prosecutors said.

Testimony resumes Nov. 19 before U.S. District Judge Richard Sullivan in New York.

The case is U.S. v. Newman, 1:12-cr-00121, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Patricia Hurtado in New York at pathurtado@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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