May 2 (Bloomberg) -- Former Diamondback Capital Management LLC fund manager Todd Newman was sentenced to 4 1/2 years in prison for his role in an insider-trading scheme that used tips from technology company insiders to earn $72 million.
U.S. District Judge Richard Sullivan imposed the term today in Manhattan federal court and also ordered Newman, 48, to pay a $4 million fine for the proceeds the fund earned from the scheme.
Sullivan said he may decide by later today whether to let Newman remain free pending his appeal. He granted a request by defense lawyers to allow Newman to serve his term at the federal prison camp in Devens, Massachusetts. That facility is where Galleon Group LLC co-founder Raj Rajaratnam is serving an 11-year sentence for insider trading.
“It’s hard to see why somebody who’d reached the pinnacle of success, who had the respect of the community and wealth, would risk that for more,” Sullivan said. “This was all about money and getting more. It’s hard to explain why somebody would do that when they had so much.”
While Newman didn’t speak in court, his lawyers cited his kindness and generosity while urging the judge to impose a prison term of less than the 63 to 78 months recommended under U.S. sentencing guidelines. John Nathanson, a lawyer for Newman, said after court his client will appeal the conviction.
Sullivan said it troubled him that trial evidence showed Newman authorized secret payments of $175,000 to the wife of one source of illicit tips and that the scheme lasted for two years.
“It was clearly done over a period of time in a surreptitious way in order to continue this gravy train of inside information that generated substantial profits,” Sullivan said.
He questioned why Newman, who earned $3 million to $4 million a year as a portfolio manager for the Stamford, Connecticut-based fund, would be motivated to commit crimes, saying he wasn’t like other defendants who were motivated by poverty or lack of opportunity.
“People should understand the lines are so bright here that the penalties have to be severe enough to send a message,” Sullivan said.
“Insider trading is a serious crime,” he said. “People should know when you do that, the penalty will be harsh.”
Newman, of Needham, Massachusetts, was convicted in December after a six-week trial along with Level Global Investors LP co-founder Anthony Chiasson. Prosecutors said they were part of a group of portfolio managers, fund analysts and insiders at technology companies who swapped and shared material nonpublic information about the firms and reaped millions of dollars in profits by trading on the illicit tips.
Newman was found guilty of four counts of securities fraud and one count of conspiracy related to trades on inside information that prosecutors said earned his fund more than $4 million from his insider trading. The jury found that he engaged in a two-year scheme to trade on Dell Inc. and Nvidia Corp. using illicit tips provided by his then-analyst, Jesse Tortora. Tortora pleaded guilty, agreed to cooperate with the U.S. and testified against Newman during the trial.
Chiasson, who was convicted of one count of conspiracy and five counts of securities fraud, is scheduled to be sentenced by Sullivan on May 13.
Six others 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 Advisors LP’s Sigma unit. In March, Michael Steinberg, a portfolio manager to whom Horvath reported, was indicted by prosecutors in the office of Manhattan U.S. Attorney Preet Bharara.
During the trial, prosecutors presented evidence that showed Newman knew he was receiving highly sensitive information about Dell and Nvidia, such as earnings and revenue data ahead of quarterly announcements.
The government’s evidence also included e-mails Newman received with the names of other fund managers who were also receiving the illicit tips, including Chiasson and Steinberg.
To date more than 80 people have been charged and more than 70 have pleaded guilty or been convicted at trial of insider trading since the Manhattan U.S. Attorney and the Federal Bureau of Investigation in New York began an initiative to combat insider trading by portfolio managers, analysts and company employees.
Diamondback, which was raided by the FBI in November 2010 as part of the federal investigation of insider trading at hedge funds, has asked for $39 million in restitution from Newman under the federal Mandatory Victims Restitution Act. The fund claims it’s a victim of Newman’s crimes and is seeking management fees lost as a result of his crimes.
The fund said after the raid that there was a “massive wave” of investor redemptions of about $1.3 billion and that it lost at least $26 million, or the 2 percent management fees it would have earned on those funds during the next year.
Diamondback avoided prosecution and agreed to pay $9 million to settle a suit brought by the U.S. Securities and Exchange Commission stemming from Newman’s case.
The fund announced it would close in December after clients pulled money as a result of publicity from Newman’s case.
Peter Neiman, a partner at WilmerHale who’s representing Diamondback, argued today in favor of restitution. He cited the non-prosecution agreement to end the criminal investigation.
Prosecutors said while they agree Diamondback is a victim of the fraud, it hasn’t established that it’s entitled to restitution for loss of its management fees.
Sullivan expressed skepticism about the restitution request.
“Should an entity’s status as a ‘victim’ turn solely on whether the government, in its discretion, decides to pull the trigger on an indictment?” Sullivan said. “It’s hard to get one’s head around the fact that Diamondback is a victim when Diamondback could have been charged as a corporate entity.”
Sullivan today ordered Newman to forfeit $737,724 to the government and said he will determine at a later date whether Diamondback should receive restitution. The judge suggested that defense lawyers submit a filing explaining their position. He said he would rule after reviewing their arguments, as well as those by the government and Diamondback.
Neiman said in a statement issued after court that Diamondback will provide Sullivan with additional information. He noted that after the government’s investigation of the hedge fund, prosecutors concluded Newman had “routinely violated” Diamondback’s compliance policies. The U.S. also determined that there was “no evidence” Newman’s conduct was “known to the firm’s co-founders,” Neiman said, quoting from a statement prosecutors issued at the time the non-prosecution agreement with Diamondback was announced.
“The government at sentencing agreed that Diamondback was a victim of Newman’s crimes and that Diamondback was therefore entitled to substantial restitution,” Neiman said in the statement.
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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