On Monday, January 23, 2012, the SEC announced that Diamondback Capital Management LLC ("Diamondback"), the Stamford, Connecticut-based hedge fund named as a defendant in the SEC’s insider trading case last week (as discussed here), has agreed to settle charges with the Commission. Diamondback will pay more than $9 million as part of the settlement, which must be approved by Judge Paul G. Gardephe, a federal judge in New York. Diamondback has also entered a non-prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York.
Diamondback and two of its employees (analyst Jesse Tortora and portfolio manager Todd Newman), along with five other men and a second hedge fund, were named in the SEC’s January 18, 2012 lawsuit. According to the charges, Mr. Tortora provided nonpublic material information about Dell Inc.’s quarterly earnings to Mr. Newman, who traded on the information on behalf of the Diamondback hedge funds he controlled. The two also combined to act on information regarding Nvidia Corporation and engage in additional trading in Diamondback’s account. At the time the case was filed, SEC Director of Enforcement Robert Khuzami called the defendants "sophisticated players who built a corrupt network to systematically and methodically obtain and exploit illegal inside information again and again at the expense of law-abiding investors and the integrity of the markets." The seven individuals named in the SEC’s lawsuit were also criminally charged (Mr. Tortora and two others have pled guilty). By using the information regarding Dell, the participants netted more than $60 million in illegal profits, which the U.S. Attorney called the "largest insider trading scheme involving single stock charged to date."
With respect to the SEC, Diamondback will pay more than $6 million of allegedly ill-gotten gains in disgorgement and will also pay a $3 million civil penalty. Under the proposed settlement, Diamondback consented to being permanently enjoined from future violations. George S. Canellos, Director of the SEC’s New York Regional Office said that "the proposed settlement appropriately sanctions the misconduct while giving due credit to Diamondback for its substantial assistance in the government’s investigation and the pending actions against former employees and their co-defendants."
In entering into the non-prosecution agreement with the U.S. Attorney’s Office, Diamondback cooperated by providing a detailed Statement of Facts setting forth the wrongful conduct of its two employees. The company was also given credit for the $6 million in disgorgement paid to the SEC. The U.S. Attorney’s Office identified several additional factors which led to the non-prosecution agreement:
• Diamondback’s prompt and voluntary cooperation upon becoming aware of the Government’s investigation;
• Diamondback’s voluntary implementation of remedial measures;
• Diamondback’s willingness to continue to cooperate with U.S. Attorney’s Office and the FBI; and
• Diamondback’s representation, based on an investigation by external counsel, that the there was no additional misconduct beyond what it had disclosed to prosecutors, and that the conduct was not known by the firm’s co-founders.
The non-prosecution agreement applies only to Diamondback and not to any of the individuals. It also requires that the firm continue to provide full and truthful cooperation, including the voluntary provision of information and documents.