Hedge Fund Managers Convicted of Insider-Trading Scheme

Level Global Investors LP co-founder Anthony Chiasson, who left SAC Capital Advisors LP to start his hedge fund, and former Diamondback Capital Management LLC portfolio manager Todd Newman were convicted in an insider- trading scheme that reaped more than $72 million.

After deliberating about two days, a jury in Manhattan federal court found both men guilty of conspiracy to commit securities fraud for a scheme to trade on Dell Inc. (DELL) and Nvidia Corp. (NVDA) using illicit tips. They remain free on bail as they await sentencing. They face as many as 20 years in prison.

The U.S. victory may accelerate the Justice Department’s investigation of SAC Capital, founded by billionaire Steven Cohen. During the trial, the judge ruled Level Global’s other co-founder, SAC Capital alumnus David Ganek, and current SAC Capital fund manager Michael Steinberg, were unindicted co- conspirators. Neither has been charged with a crime.

The jury found Chiasson, 39, guilty of five counts of securities fraud, earning Level Global $68.5 million on inside tips trading on the two technology company stocks. Newman, 48, was convicted of four counts of securities fraud related to trades on inside information that earned his fund about $3.8 million.

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Anthony Chiasson, co-founder of Level Global Investors LP, exits federal court in New York, U.S., on Tuesday, Nov. 13, 2012. Close

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Anthony Chiasson, co-founder of Level Global Investors LP, exits federal court in New York, U.S., on Tuesday, Nov. 13, 2012.

“We had all the evidence we needed,” said Felicia Rivera, a juror from Westchester County near New York City, said after court. Harper Buonanno, another juror, said the panel considered the testimony of the four cooperating witnesses, including two analysts who worked for the defendants.

‘Documentary Evidence’

“We had a lot of the government’s documentary evidence, including the witnesses’ testimony,” Buonanno said after yesterday’s verdict. “We had a lot of evidence available to us. We used it all.”

Manhattan U.S. Attorney Preet Bharara’s office has charged 75 people with insider trading since October 2009. Seventy-one of those pleaded guilty or were convicted after trial. Newman and Chiasson, after the seventh trial connected to the probe, are the ninth and 10th defendants convicted by federal juries in Manhattan. The two men face sentencing by U.S. District Judge Richard Sullivan on April 19.

Assistant U.S. attorneys Antonia Apps, Richard Tarlowe and John Zach argued during the trial, which began Nov. 7, that the two portfolio managers were part of a “corrupt chain” of analysts and insiders at the two technology companies who swapped and traded on illicit tips. The scheme ran from late 2007 until 2009, prosecutors said.

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Todd Newman, a former portfolio manager for Diamondback Capital Management LLC, exits federal court in New York, U.S., on Tuesday, Nov. 13, 2012. Close

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Todd Newman, a former portfolio manager for Diamondback Capital Management LLC, exits federal court in New York, U.S., on Tuesday, Nov. 13, 2012.

Chiasson and Ganek

Chiasson and Ganek started Level Global in 2003. The $4 billion hedge fund was liquidated last year after the FBI raided its offices in November 2010. Ganek currently invests his own money through his firm Apocalypse 22 LLC. His spokesman, Davidson Goldin, didn’t return e-mails and telephone messages yesterday seeking comment on the verdict.

Diamondback, run by Richard Schimel and Lawrence Sapanski - - also alumni of SAC Capital -- told clients earlier this month that it was closing after the raids by the Federal Bureau of Investigation prompted investors to pull out their money. Schimel and Sapanski haven’t been accused of wrongdoing.

The government agreed not to prosecute Diamondback for the actions of Newman and Tortora and said the co-founders weren’t aware of their misconduct.

Six people charged with being part of the insider-trading ring have pleaded guilty and are cooperating with the U.S., including Jon Horvath, a former analyst at SAC Capital’s Sigma unit.

Four Cooperators

Four cooperators testified at trial, including former Diamondback analyst Jesse Tortora, who worked for Newman, and Spyridon “Sam” Adondakis, a former Level Global analyst who worked for Chiasson. Both men took the stand and told jurors they swapped inside information on technology companies which they passed to their fund managers who they said traded on it. Tortora testified he passed the information to Newman while Adondakis told jurors he gave tips to Chiasson.

The Dell information Adondakis and Tortora passed was obtained from their friend Sandeep “Sandy” Goyal, a Neuberger Berman analyst who once worked at Dell, both Tortora and Adondakis said. Goyal also testified at the trial.

Information about Nvidia was obtained from Danny Kuo, a former analyst at Whittier Trust Co., a South Pasadena, California-based wealth-management company, who had obtained it from a friend.

Secret Information

Tortora, who worked for Newman from 2007 to 2010, testified that Goyal had repeatedly provided nonpublic information about Dell, such as gross margins, revenue numbers and sales, allowing Newman to earn millions of dollars. Goyal got the data from a Dell employee, Tortora said.

Adondakis, 41, who worked as a technology analyst for Chiasson, testified that the fund manager knew he was sharing illicit tips with a group of friends.

Prosecutors also showed jurors e-mails the analysts sent their fund managers which they said were examples of the nonpublic information being passed.

Adondakis testified he had conversations with Chiasson in which he told his fund manager that he was sharing nonpublic information with at least five others, including Horvath and Ron Dennis, a former analyst with SAC’s CR Intrinsic unit. Dennis hasn’t been charged with wrongdoing.

Dell, Nvidia

Adondakis said Chiasson knew that Horvath was passing the information to his fund manager, Michael Steinberg. Barry Berke, a lawyer for Steinberg, declined to comment on the claim.

Prosecutors said during the trial that in 2008, Chiasson and Level Global earned $57 million on illegal tips on Dell while Newman and Diamondback earned $3.8 million on secret information about the computer maker. Chiasson and his fund earned $10 million on Nvidia tips in 2009 while Newman and Diamondback earned $48,000, prosecutors said.

John Nathanson, a lawyer for Newman, and Chiasson’s lawyer, Reid Weingarten, argued during closing arguments last week the that their clients didn’t know that the information they received was from company insiders. “We’re going to certainly appeal,” Weingarten said after the verdict.

“Obviously, we believe the jury came to the wrong conclusion and we will vigorously pursue Mr. Chiasson’s appellate rights,” said Greg Morvillo, another lawyer for Chiasson.

‘Honest, Hardworking’

“We believe that, in the end, Mr. Chiasson’s good name will be restored,” Morvillo said in an e-mail. “He has always been, and will continue to be, an honest, hardworking man.”

Nathanson and Steve Fishbein, lawyers for Newman, declined to comment after court.

“With today’s guilty verdicts, Todd Newman and Anthony Chiasson join the ranks of high-level investment fund managers who are being made to answer for their extraordinarily bad risk- reward analysis about what is right and what is wrong,” Bharara said in a statement yesterday.

“Every member of this close-knit criminal club now stands convicted,” Bharara said. “Like scores of privileged professionals before them, Newman and Chiasson are finding out the hard way that the opportunity cost of gaining an illegal edge in the market is the loss of one’s liberty.”

Steve Bruce, a spokesman for Diamondback, declined to comment on the verdict. The fund told clients on Dec. 6 it will shut after the FBI raided its offices two years ago, prompting investors to flee.

Curry Favor

Defense lawyers for Newman and Chiasson both assailed the credibility of the cooperators and said Tortora and Adondakis had only implicated the portfolio managers to curry favor from the government and avoid prison for crimes they themselves had actually committed.

The lawyers argued both defendants were unaware the analysts had been providing them with inside information and said many of the e-mails shown by prosecutors at trial could be viewed as being based on legitimate research.

Newman’s lawyer, Nathanson, argued that his client’s trading pattern was inconsistent with someone who possessed accurate revenue and gross margin numbers from a company insider. The lawyer also argued that his client often lost money by selling stock at a time the insider tips indicated it would do well.

Newman’s Defense

“The question is: ‘what did Todd Newman know?’” Nathanson said. “Did he believe he was getting inside information or did he believe he was getting legitimate work from his analyst who he paid to do a legitimate job?” Nathanson said during closing arguments on Dec. 11.

Chiasson’s lawyer, Weingarten, called Adondakis a “liar.” The lawyer argued there was no direct evidence corroborating Adondakis’s claims he had told Chiasson about the insider- trading scheme and told him the source of the information and that it wasn’t public.

While Adondakis testified that he gave Chiasson nonpublic information from company insiders that he got from Tortora, Weingarten showed jurors e-mails that he said showed Adondakis frequently edited the information he sent the portfolio manager, omitting the source of the data and claiming analyst research done by Tortora as his own.

Prosecutors argued that Newman and Chiasson must have understood that the information they were getting was from company insiders because the e-mails said the information was coming from company employees, the data was so precise, and it was continually updated until just before Dell and Nvidia announced their earnings.

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 federal court at pathurtado@bloomberg.net

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

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