Todd Newman, the former Diamondback Capital Management LLC portfolio manager charged with insider trading, lost a bid to be tried separately from Level Global Investors LP co-founder Anthony Chiasson.
U.S. District Judge Richard Sullivan in Manhattan, who is presiding over the case, yesterday denied Newman’s request, ruling that the two men will be tried together as scheduled starting Oct. 29. Newman had argued that some e-mail evidence his co-defendant planned to show the jury would be highly prejudicial to him.
Prosecutors allege Chiasson, Newman and a group of analysts, fund managers and insiders at technology companies swapped illegal tips on Dell Inc. and Nvidia Corp. as well as the stocks of 11 more companies. Chiasson and Newman earned more than $67 million in illicit profits, the U.S. said.
Both men, who were first arrested and charged in January, pleaded not guilty yesterday to new charges filed against them in August.
Chiasson sought to introduce as part of his defense several hundred e-mails, including some from Jesse Tortora, a former Diamondback analyst who has pleaded guilty and is cooperating with the U.S. Newman’s lawyers asked that Chiasson be barred from entering the e-mails as evidence if Sullivan didn’t grant separate trials.
“Mr. Chiasson is proposing to put in evidence a very large number of communications about various stocks and sources of information that the government itself will not address in its case,” Newman’s lawyers Stephen Fishbein and John Nathanson argued in court papers.
Sullivan said yesterday that he will decide later on a prosecution request to keep the jury from hearing recorded calls of Chiasson allegedly receiving illegal tips about Dell, the maker of personal computers, from John Kinnucan, founder of an expert-networking firm, who has since pleaded guilty.
The judge denied a bid by both defendants to exclude evidence about their compensation. Chiasson made $9.79 million at Level Global in 2009, not including deferred compensation or profit sharing, his lawyers said. Newman’s earnings weren’t included in court papers filed by Nathanson.
Sullivan yesterday also declined to rule on a request by defense lawyers to have the jury hear some recordings of telephone calls made by Tortora at the behest of the Federal Bureau of Investigation.
Assistant U.S. Attorney Antonia Apps yesterday urged Sullivan to exclude the calls, saying they were “hearsay” and contained incriminating and false statements that could confuse jurors and prejudice the panel against the government’s case.
The recordings include a Dec. 1, 2010, call Tortora made under the FBI’s direction to another co-defendant, Whittier Trust Co. fund manager Danny Kuo, after federal agents raided Diamondback and three other hedge funds a week earlier.
The U.S. said the purpose of the call was to have Tortora, who was secretly cooperating with the FBI, elicit incriminating statements from Kuo.
“Members of the jury may object to the notion that the FBI is recording individuals without telling them, or that cooperating witnesses engaged in deceptive behavior at the direction of the FBI, even though these are entirely permissible law enforcement techniques,” the prosecutors said in a filing on Oct. 22.
The calls “were an undercover ruse set up by the FBI,” prosecutors said in the filing.
Sullivan said yesterday he was inclined to allow defense lawyers to cross-examine Tortora about any statements he may have made during the calls. The judge also said he was “skeptical” about allowing the recordings to be played during the trial.
Sullivan said he wouldn’t issue a final decision on the recordings until the trial progresses.
Tortora pleaded guilty in 2011 to passing nonpublic information to Newman and others. Kuo pleaded guilty in April, admitting he used illegal tips to trade in Dell. Six of eight people charged in the case have pleaded guilty and are cooperating with prosecutors.
“What’s happening, man?” Tortora asked during the Dec. 1, 2010, call, according to a transcript prosecutors submitted with their request.
“Dude, is your phone tapped?” Kuo replied.
“Wait, is the phone tapped?” Tortora asked, adding, “Why do you ask that?”
“Uh, because I saw on the news, on Bloomberg,” Kuo said, “that you and Todd are, uh, being investigated.”
Kuo warned Tortora during the call about talking to the U.S. and implicating others, including Newman.
“I’m not trying to say you should throw Todd under the bus,” Kuo said. “Before throwing names out there, consider the consequences.”
Kuo concluded the call with a final warning to Tortora about making future calls from his personal telephones, according to the transcript.
“I would seriously invest in some quarters, and start calling from 7-Elevens,” Kuo said.
Newman’s lawyers argued yesterday that the recordings should be heard, saying Tortora’s credibility “will be at issue.” The recordings contain statements that indicate Tortora “intends to blame Mr. Newman for anything he has done wrong,” the lawyers said.
Fishbein told Sullivan he expects Tortora will be the government’s first witness.
During the December 2010 call, Kuo told Tortora: “The best thing to do, for you, right now is to push every responsibility up to Todd,” according to the transcript.
Kuo also questioned Tortora about why he called.
“To be honest with you, I don’t even know why I’m taking your call,” Kuo said. “I have high suspicion that this phone line could be tapped.”
Both men discussed possible defense strategies they could raise when questioned by authorities. Tortora said on the call that he had gone in to speak to the FBI and was questioned about Newman. He didn’t tell Kuo he was already cooperating with the government.
“You might consider hiring yourself a lawyer,” Kuo said, citing news reports that Diamondback was one of four funds being investigated by the U.S.
Greg Morvillo, a lawyer for Chiasson, and Nathanson and Fishbein all declined to comment on the judge’s rulings.
Eight people have been charged in the case and six have pleaded guilty to insider-trading charges.
Jon Horvath, a former technology analyst at a unit of Steven Cohen’s $14 billion hedge fund SAC Capital Advisors LP, pleaded guilty on Sept. 28 to passing nonpublic information to his portfolio manager. Horvath, who had been charged with Chiasson and Newman, is cooperating with the U.S.
Manhattan U.S. Attorney Preet Bharara, whose office is prosecuting the case, has pursued a wide-ranging probe of hedge funds that has yielded 70 convictions either through guilty pleas or at trial.
The case is U.S. v. Newman, 12-00124, U.S. District Court, Southern District of New York (Manhattan).