* U.S. says Diamondback could recover up to $12.9 mln
* Diamondback sought up to $39 mln
* Newman plans to appeal insider trading conviction
* Sentencing set for May 2
By Jonathan Stempel
NEW YORK, April 26 A Diamondback Capital
Management portfolio manager convicted of insider trading should
reimburse up to $12.9 million to his former employer, in
addition to serving as much as 6-1/2 years in prison, federal
prosecutors said on Friday.
In papers filed in U.S. District Court in Manhattan,
prosecutors said Diamondback qualified as a "victim" of the
former manager, Todd Newman.
They said Diamondback deserves restitution under the federal
Mandatory Victims Restitution Act, though less than the $39
million that the hedge fund has sought.
The government's involvement came after Goldman Sachs Group
Inc and Morgan Stanley last year sought to recoup
large sums of fees and costs from people who were once
affiliated with them and were convicted of insider trading.
Diamondback decided to close in December. It is trying to
recoup costs linked to its ties to the broad government insider
trading probe, which had caused clients to withdraw nearly
three-fourths of the more than $5 billion of assets it once
Newman was convicted in December of four counts of
securities fraud and one count of conspiracy tied to illegal
trades in Dell Inc and Nvidia Corp stock. He
is to be sentenced on May 2.
In their court papers, prosecutors asked U.S. District Judge
Richard Sullivan in Manhattan to hand Newman a prison term of
5-1/4 to 6-1/2 years and order him to disgorge $816,000,
representing some of his trading profits. They called Newman "a
central and active participant" in a large insider trading
Newman has, in separate papers, requested a sentence
"significantly below" what prosecutors want, and also asked to
remain free on bail pending an appeal of his conviction.
A lawyer for Newman did not immediately respond to a request
on Friday for comment.
Prosecutors said Diamondback was a victim of Newman because
it provided the funds that enabled him to make his wrongful
stock trades, and then paid him more after the trades led to
roughly $4 million of illegal profit.
They said Diamondback should recoup as much as $10.22
million for legal fees and expenses, plus as much as an
additional $2.67 million, a sum representing one-fourth of
Newman's compensation between 2007 and 2010.
But Diamondback should not recover $26 million for lost
management fees stemming from client fund withdrawals,
They cited a lack of evidence that Newman foresaw the
withdrawals or that the withdrawals stemmed from his conviction.
Prosecutors previously named Newman and Anthony Chiasson, a
co-founder at the now defunct Level Global Investors, as
co-conspirators of Michael Steinberg, a portfolio manager at
billionaire Steven Cohen's SAC Capital Advisors.
Steinberg was indicted in March for insider trading and has
pleaded not guilty. Chiasson was tried with Newman and also
convicted, and is to be sentenced on May 13.
Other insider trading defendants have also faced
reimbursement claims from their former firms.
Rajat Gupta, a former member of Goldman's board of
directors, is appealing a judge's order that he pay $6.22
million to the bank to cover its legal expenses related to his
criminal insider trading case. Gupta was convicted in June 2012.
Hedge fund manager Joseph "Chip" Skowron, who pleaded guilty
in August 2011 for his role in an insider-trading scheme, was
sued in November by Morgan Stanley to recover $33 million it
said it paid U.S. regulators to settle civil claims related to
his crimes. That case is still open.
The case is U.S. v. Newman, U.S. District Court, Southern
District of New York, No. 12-cr-00121.