Todd Newman, the former Diamondback Capital Management LLC portfolio manager found guilty of taking part in a $72 million insider-trading scheme, appealed his conviction and 4 1/2-year prison term.
Newman, 48, of Needham, Massachusetts, filed his arguments today with the U.S. Court of Appeals in New York and asked to remain free while he pursues the case. U.S. District Judge Richard Sullivan in Manhattan, who presided over Newman’s trial, rejected a similar request on May 7 and ordered Newman to surrender to U.S. Bureau of Prison officials by July 8.
His lawyers argue there is a “substantial question” of law to be decided in the case, saying that Sullivan issued a ruling that made it easier for the government to prove culpability for insider trading.
The defense lawyers argued that two other judges in the Manhattan federal courthouse have ruled differently, concluding that the recipient of a tip isn’t liable for insider trading unless he knew the person who provided the illegal information did so for a personal benefit.
“The fact that well-informed judges can and have disagreed confirms that the issue is the very paradigm of ‘fairly debatable,’” lawyers Stephen Fishbein and John Nathanson said in a motion filed with the appeals court.
“If this court accepts Mr. Newman’s legal argument that knowledge of personal benefit is required, he is likely to win a reversal of his conviction,” they said.
Julie Bolcer, a spokeswoman for Manhattan U.S. Attorney Preet Bharara, declined to comment on the appeal.
Prosecutors said Newman earned more than $4 million by trading on illicit tips on Dell Inc. and Nvidia Corp. he had obtained from Jesse Tortora, the analyst who worked for him. Newman’s lawyers argued that he was far removed from the tippers and that prosecutors didn’t provide evidence his sources were getting any personal benefits for the tips they passed.
“The government offered no evidence that Mr. Newman knew of any personal benefits obtained by the Dell and Nvidia insiders,” Fishbein and Nathanson said in today’s filing.
“Nearly 30 years of precedent in the Southern District of New York established that insider trading liability requires a tippee to know that the insider received a personal benefit,” the lawyers wrote.
Newman’s attorneys said Sullivan’s position is contrary to earlier rulings by U.S. District Judge Jed Rakoff in the insider-trading case against Whitman Capital LLC hedge fund founder Doug Whitman and former U.S. District Judge Richard Holwell’s decision in the insider-trading trial of Galleon Group LLC co-founder Raj Rajaratnam. Both were convicted by juries.
Indicted SAC Capital Advisors LP fund manager Michael Steinberg cited Sullivan’s ruling lessening the government’s burden of proof in Newman’s case as one reason he wanted his own insider trading case reassigned to a different judge. Sullivan last week rejected the request by Steinberg’s attorney, Barry Berke, that he recuse himself, telling Steinberg during a hearing, “You’re stuck with me.”
Newman was convicted in December along with Level Global Investors LP co-founder Anthony Chiasson after a six-week jury trial.
Chiasson is scheduled to be sentenced by Sullivan on May 13. Prosecutors said he should serve at least 10 years in prison. His lawyers are seeking an unspecified lesser term.
The U.S. said both fund managers were part of a group of portfolio managers, analysts and insiders at technology companies who obtained and swapped illegal tips.
In denying Newman’s request to remain free, Sullivan said in his May 7 ruling that while prosecutors aren’t worried the defendant will try to flee, it’s unlikely that a challenge to the conviction will raise a “substantial question of law or fact” that will affect the outcome of the case.
Fishbein declined to comment on the appeal.
Six others charged with being part of the insider-trading ring with Newman have pleaded guilty and are cooperating with the U.S., including Jon Horvath, a former analyst at SAC who reported to Steinberg.
Newman today asked the appeals court to consider letting him remain free beyond the date he must report to prison if it hasn’t ruled on his motion by then.
Sullivan said he would recommend that Newman serve his term at the federal prison camp in Devens, Massachusetts. That facility is where Rajaratnam is serving his 11-year sentence.
The case is U.S. v. Newman, 1:12-cr-00121, U.S. District Court, Southern District of New York (Manhattan).