U.S. Repays $6 Million to Hedge Fund in Insider-Trading Reversal

  • Diamondback, now closed, also received $3 million from SEC
  • More than $40 million returned after convictions overturned

Preet Bharara speaks during a news conference in New York, on May 19, 2016.

Photographer: Peter Foley/Bloomberg

Strike $6 million from the total that Manhattan U.S. Attorney Preet Bharara extracted from hedge funds and executives caught in his seven-year insider-trading dragnet.

U.S. prosecutors have agreed to return that amount to Diamondback Capital Management LLC in a deal approved by a federal judge on Thursday. The hedge fund paid the $6 million to the government as part of a 2012 non-prosecution agreement related to Bharara’s insider-trading probe. The fund, which at its peak managed $5.8 billion, closed later that year.

The U.S. government has been made several of these unusual repayments in the aftermath of its historic pursuit of insider trading, which led to 80 convictions, brought down at least five hedge funds and resulted in more than $2 billion in payments from defendants. 

Fourteen of those convictions have now been overturned -- including two that were struck down by an appeals court in 2014, opening the door for the victors and others to claw back penalties and fines from the Justice Department and the U.S. Securities and Exchange Commission. The government has now handed back more than $40 million in all, including to three individuals whose convictions were overturned and two of the hedge funds where they worked.

"Reversals are uncommon in general," said Stephen Miller, an attorney with Cozen O’Connor in Philadelphia. "That would make the return of money even more uncommon."

Jim Margolin, a spokesman for Bharara, declined to comment on the repayment.

​“We recognize that it is highly unusual for the government to voluntarily take this action and appreciate their efforts to bring fair and final closure to the matter,” Steve Bruce, a spokesman for Diamondback, said in a statement Friday.

For a graphical description of Bharara’s insider-trading crackdown, click here.

Diamondback originally agreed to pay the penalties to end Bharara’s criminal investigation and a regulatory probe by the U.S. Securities and Exchange Commission. As part of the $9 million deal, Diamondback obtained a non-prosecution agreement in January 2012 just as the government was announcing criminal charges against Diamondback fund manager Todd Newman and Level Global Investors LP co-founder Anthony Chiasson.

Diamondback continued operating until December 2012, about 10 months after Newman and Chiasson were charged. 

The SEC repaid Diamondback $3 million earlier this year. Level Global, which closed after federal prosecutors raided its offices, also won judicial approval earlier this year to get back $21.5 million it had paid to the SEC. The SEC didn’t oppose the requests. 

Newman got back $1.73 million that he’d been ordered in 2013 to put in escrow by U.S. District Judge Richard Sullivan, pending the outcome of his his appeal, according to his attorney John Nathanson. Chiasson was repaid $6.38 million in criminal fines and forfeitures he’d placed in escrow in 2013 pending his appeal, his attorney, Greg Morvillo, said.

Dropped Charges

In addition to the repayments to the two funds and the pair of executives, Michael Steinberg, a former fund manager with SAC Capital Advisors LP, was ordered by a federal court in November to have $2.4 million returned that he’d paid into an escrow account pending the outcome of a case against him. Bharara dropped the charges in October following the Newman ruling, which made it more difficult for the government to prosecute insider-trading cases.

The refunds are among several setbacks for the government recently in its insider-trading crackdown. Earlier this year, an appeals court temporarily released convicted stock trader Douglas Whitman from a California halfway house after he argued that his conduct may not have been illegal, depending on how the U.S. Supreme Court rules in another pending insider-trading case.

Five others convicted of insider trading, including former Goldman Sachs Group Inc. director Rajat Gupta, have sought reviews of their cases.

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