Dell scheme said to net over $60m
A former hedge fund manager from Needham was among seven people charged yesterday by federal authorities in an insider trading case that allegedly earned more than $60 million in illegal profits on shares of computer giant Dell Inc.
Todd Newman, 47, was arrested yesterday morning and later appeared before US Magistrate Judge Marianne B. Bowler in Boston. Newman had been a portfolio manager for Diamondback Capital, a large hedge fund firm in Stamford, Conn., until last year.
The case is part of a broadening government probe into alleged sharing of confidential information about publicly traded companies between employees and stock analysts or professional investors.
Alfred Pavlis, a lawyer representing Newman, declined to comment on the charges. “We are going to review the allegations and respond in New York,’’ he said.
Bharara said a group of research analysts for investment firms were at the core of the alleged insider trading operation. One of the group was Jesse Tortora, a stock analyst who worked with Newman at Diamondback Capital.
The prosecutor said Tortora and his friends received inside information on Dell’s earnings from a source at the Texas computer maker and passed it to fund managers, including Newman, for illegal profits that totaled $61.8 million.
Most of the illegal profit, authorities alleged, was made by just one hedge fund firm, Level Global Investors, whose co-founder, Anthony Chiasson, was also charged in yesterday’s action.
Bharara described the circle of friends as forming “a criminal club whose purpose was profit and whose members regularly bartered lucrative insider information.’’
Newman allegedly traded on confidential information he received from Tortora about Dell’s earnings for two periods in 2008 before the company had released it to the public. The two trades netted Diamondback a $3.8 million profit.
In turn, Newman and Tortora allegedly repaid their tipster $175,000 through another member of the ring, Sandeep “Sandy’’ Goyal, a former Dell employee who worked as an analyst at Neuberger Berman, a Manhattan investment company.
In one case, prosecutors allege Tortora relayed information that Dell’s earnings per share would probably be higher than Wall Street forecasts when the company reported quarterly financial results in May 2008. A portfolio managed by Newman purchased Dell shares worth $10 million and quickly made a profit of $1 million after the positive news was disseminated, prosecutors said.
In a second case, Tortora allegedly forwarded news that Dell’s profit margins might fall short of expectations when it reported earnings for the following quarter. Federal officials said Newman executed a series of trades that would profit if Dell stock lost value, earning $2.8 million on the transactions.
A spokesman for Diamondback declined to comment on the case yesterday. But the firm wrote a letter to investors, telling them it “has been proactively assisting the US attorney’s office and the SEC since we became aware of the inquiry.’’ Diamondback described the criminal charges as “an important step towards putting this matter behind us.’’
This latest insider trading case is an offshoot of the massive investigation underway by federal authorities into illegal passing of confidential information among hedge funds, consultants at so-called expert networks, and corporate insiders that to date have netted 56 convictions.
Prosecutors revealed that both Tortora and Goyal have already pleaded guilty to one count of conspiracy to commit securities fraud and one count of securities fraud each, as has one other member of the alleged ring, Spyridon Adondakis, a research analyst at Level Global. Authorities said the three cooperated with the investigation.
The other alleged ring members facing charges include Jon Horvath, who worked at the Connecticut hedge fund Sigma Capital Management, and Danny Kuo who worked at a West Coast investment firm.
Robert Khuzami, director of enforcement for the Securities and Exchange Commission, said the work of the alleged insider trading ring was more disturbing than other types, such as those who stumbled over secret information or learned confidential information on a one-time basis.
“Today’s actions lay bare an organized network of analysts and fund traders who set up and used a corruption network to obtain insider information,’’ Khuzami said at a news conference in Manhattan.
Its name once again dragged through the mud with the arrest of a former portfolio manager, Diamondback Capital Partners is again trying to reassure investors that their money is safe.
The Stamford, Conn.-based hedge fund has beaten the odds so far, surviving in spite of a raid of its office, the arrest of a former trader and some $2 billion in redemptions. But Tuesday saw the arrest of another former trader, Todd Newman, who was charged along with seven others with insider-trading.
Newman and three others, including a SAC Capital Advisors trader and a founder of hedge fund Level Global Investors, were arrested thanks to the cooperation of the three others charged in the case, all of whom have pleaded guilty. One of the cooperating witnesses is Jesse Tortora, a former Diamondback analyst and the alleged go-between in the ring, buying confidential information about Dell Inc. and trading it with his fellow alleged insider-traders.
But Diamondback said it “has been proactively assisting the U.S. Attorney’s Office and the SEC since we became aware of the inquiry,” Hedge Funds Review reports.
“The fruits of that cooperation are reflected in the charges filed and unsealed today against two former employees,” Diamondback’s Richard Schimel and Larry Sapanski wrote to clients. They called their cooperation “an important step in putting this matter behind us.”
Newman’s illegal trades earned Diamondback $3.9 million, according to the Securities and Exchange Commission. The firm, which has never itself been accused of any wrongdoing, settled with the SEC in August. It said that Newman was put on leave immediately after the Federal Bureau of Investigation’s raid of Diamondback’s offices last November.
Four hedge funds were raided that month. The other three, including Level Global, have since closed.