(January 24, 2012) — Diamondback Capital Management has avoided criminal charges and has agreed to shell out a total of $9 million to the government to put an end to an insider-trading investigation involving Dell Inc. and Nvidia Corp. stock.
The agreement, subject to court approval, is the latest in a long string of high-profile cases aimed at thwarting insider trading among hedge funds and would resolve a January 18 Securities and Exchange Commission (SEC) lawsuit over trades made in 2008 and 2009 by former employees at Diamondback.
The government agreed to spare the Stamford, Conn.-based hedge fund of criminal charges, citing the fund’s ready cooperation and voluntary adoption of remedial measures. The fund has agreed to enter into a nonprosecution agreement with the Justice Department in connection with a criminal investigation. Under the proposed settlement, according to the SEC, Diamondback will additionally pay a $3 million civil penalty. Furthermore, Diamondback consented to a judgment that permanently enjoins it from future violations of federal anti-fraud laws.
“We are pleased to have reached a prompt resolution of the charges against Diamondback,” said George S. Canellos, Director of the SEC’s New York Regional Office, in a statement. “If approved by the court, 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.”
Last week, the SEC accused Diamondback along with two of its former employees, another hedge fund, and five other individuals of civil insider-trading violations. Federal prosecutors announced criminal charges against seven individuals, accusing them of a massive insider trading scheme. “Today’s charges illustrate something that should disturb all of us: They show that insider trading activity in recent times has, indeed, been rampant and routine and that this criminal behavior was known, encouraged and exploited by authority figures in several investment funds,” United States Attorney Preet Bharara told a news conference following the charges. According to prosecutors, the alleged scheme, which involved trades in Dell Inc., led to a total of $61.8 million in illegal profits.
The SEC issued a released stating:
“The SEC alleges that a network of closely associated hedge fund traders at Stamford, Conn.-based Diamondback Capital Management LLC and Greenwich, Conn.-based Level Global Investors LP illegally obtained the material nonpublic information about Dell and Nvidia. Investment analyst Sandeep ‘Sandy’ Goyal of Princeton, N.J., obtained Dell quarterly earnings information and other performance data from an insider at Dell in advance of earnings announcements in 2008. Goyal tipped Diamondback analyst Jesse Tortora of Pembroke Pines, Fla., with the inside information, and Tortora in turn tipped several others, leading to insider trades on behalf of Diamondback and Level Global hedge funds.”
In 2010, Diamondback was raided by Federal Bureau of Investigation agents as part of a criminal insider-trading probe.