SEC Charges Hedge Funds and Individuals In Insider Trading Scheme

The Securities and Exchange Commission (SEC) has filed a proposed settlement, subject to court approval, for insider trading violations against seven fund managers and analysts along with two multi-billion dollar hedge fund advisory firms, Diamondback Capital Management LLC and Level Global Investors LP. According to the SEC, individuals with both firms received nonpublic, material information about Dell Inc. and Nvidia Corp. The cases charge illicit gains exceeding $62.3 million for the Dell trades and $15.7 million for the Nvidia trades.

The seven individuals named in the SEC complaint are Sandeep Goyal, Jesse Tortora, Todd Newman, Spyridon Adondakis, Anthony Chiasson, Jon Horvath and Danny Kuo. Goyal is charged with obtaining quarterly earnings information from an insider at Dell and telling Diamondback Analyst Tortora, who in turn tipped his portfolio manager Newman. Tortora also allegedly tipped three other people: Horvath, Kuo, and Adonakis, an analyst at Level Global who tipped his manager, Chiasson. In turn, Kuo allegedly obtained nonpublic, material information about Nvidia and tipped Tortora and Adondakis. SEC Enforcement Division Director Robert Khuzami said, “These are not low-level employees succumbing to temptation by seizing a chance opportunity. These are 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 case was developed from information from a November 2010 F.B.I. raid of the funds. The SEC claimed that defendants violated Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5.

Diamondback will not face criminal charges. The hedge fund entered into a non-prosecution agreement with the United States Attorney’s office which agreed not to pursue criminal charges as a result of the fund’s cooperation and its voluntary adoption of remedial measures. As a penalty, Diamondback will have to forfeit profits of $6 million and pay a $3 million civil penalty. The director of the SEC’s New York office George Cannellos stated, “We believe 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.” Jesse Tortora, Spyridon Adondakis, and Sandeep Goyal have also pleaded guilty to criminal charges of insider trading and are cooperating with the government in connection with the case. Level Global Investors has shut down operations.

Diamondback co-founders Richard Schimel and Larry Sapanski have said they are working to ensure investors that there is no other improper trading at the firm by conducting an extensive internal review through outside counsel. They have also said that the fund’s principals, and not the investors, will bear the costs related to the investigations. In a letter to investors, they wrote, “We are gratified to have reached closure on the government proceedings, and deeply regret the difficulties cause to our investors during the last 14 months. Everyone at Diamondback is looking forward to a successful 2012.” Apparently, however, their efforts have not overcome the negative publicity that Diamondback has received. Its assets under management have been halved, dropping from more than $5 billion to about $2.5 billion.

Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.