THE FIRST SETTLEMENT IN THE DELL INSIDER TRADING CASES

The DOJ and the SEC settled insider trading charges with Diamondback Capital Management, LLC in the Dell insider trading cases. The firm entered into a non-prosecution agreement with the U.S. Attorney’s Office to resolve possible criminal charges. Under the terms of that agreement the firm will forfeit $6 million based on the profits it obtained/losses avoided. Diamondback also provided the U.S. Attorney’s Office with a detailed Statement of Facts relating to the alleged wrongful conduct of two of its employees named as defendants. The firm also represented, based on an investigation by external counsel, that the misconduct under investigation does not extend beyond that described in the Statement of Facts and was not known by the co-founders of the firm. Diamondback agreed to cooperate with the government’s on-going investigation. See also U.S. v. Newman, 12 mag 0124 (S.D.N.Y. Filed Jan. 18, 2012)(insider trading charges filed against the individuals in the Dell insider trading case, including two persons formerly of Diamondback; the firm was not named as a defendant).

The SEC also resolved its charges with Diamondback. SEC v. Addondakis, 12-cv-0409 (S.D.N.Y. Filed Jan. 18, 2012)(naming Diamondback as a defendant along with others). To settle with the SEC the firm consented to the entry of a permanent injunction which precludes future violations of the antifraud provisions of the federal securities laws. The settlement also requires that the firm disgorge its trading profits – a point covered in the settlement of the criminal inquiry – and pay a civil penalty of $3 million. In connection with the settlement the SEC was furnished with a Statement of Facts as in the resolution of the criminal case. The settlement papers do not specify that the firm neither “admits nor denies” the allegations in the complaint as in traditional Commission settlements (here). The SEC acknowledged the cooperation of the firm as did the U.S. Attorney’s Office.

The underlying charges center on trading in the shares of Dell, Inc. and NAVIDIA based on inside information. According to the court papers, Todd Newman a portfolio manager at Diamondback, Jesse Tortora, an analyst at the firm, and others obtained inside information regarding forth-coming earnings releases for each firm and used the information to trade and illegally tip others in 2008 and 2009. Mr. Tortora previously pleaded guilty in the criminal case (here).

In previous criminal insider trading cases stemming from the Galleon and expert network inquiries, criminal charges were not filed against the entities involved. However, Galleon Management, Level Global Investors, Loch Capital Management and Barai Capital ceased operations. In contrast, Diamondback did not.