Two former hedge fund managers reaped a total of $70.8 million in illegal profits by tapping a "corrupt network" of Wall Street analysts, a U.S. prosecutor said at the start of an insider trading trial on Tuesday.
Todd Newman, who was a portfolio manager at Diamondback Capital Management, and Anthony Chiasson, co-founder of Level Global Investors, were charged in January in a sweep dubbed "Operation Perfect Hedge" by the Federal Bureau of Investigation. More than 70 people have been charged in the government's broad probe of Wall Street trading.
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Chiasson, 39, and Newman, 48, are accused of illegally trading ahead of computer maker Dell Inc's earnings reports for the first and second quarters of 2008, netting profits of $57 million and $3.8 million, respectively. Chiasson is also accused of netting $10 million in illegal profits ahead of the May 2009 results of chipmaker Nvidia Corp.
Prosecutor Richard Tarlowe told jurors in U.S. District Court in Manhattan that Newman and Chiasson had made huge trades based on confidential company secrets obtained by a close-knit group of research analysts.
"This is a case about how the defendants got secret, confidential information about publicly traded companies," Tarlowe said. "They chose to break the law and to use (the information) anyway. Why? To make big money for themselves and for their hedge funds."
Lawyers for Newman and Chiasson countered that their clients did not know that any of the information was secret because the analysts who provided it had made their stock recommendations appear legitimate.
Several of those analysts have previously pleaded guilty to related insider trading charges. One of them, Jesse Tortora, began testifying for the prosecution on Tuesday.
"What Mr. Newman did not know was that mixed in Mr. Tortora's information... was information that Mr. Tortora now says was obtained improperly," Newman's lawyer, Stephen Fishbein, said in his opening statement.
Tortora, who worked for Newman as an analyst, made his work appear like "legitimate, honest research," Fishbein said.
Former Level Global analyst Spyridon Adondakis, who has also pleaded guilty, is expected to testify at a later date.
Together with Sandeep "Sandy" Goyal - who is cooperating with the government - and others, the analysts formed a "corrupt network of professionals who chose to break the rules," Tarlowe said.
Reid Weingarten, a lawyer for Chiasson, went even further, saying the group of analysts had built a friendship around obtaining insider secrets. "They likened themselves to the 'Fight Club,'" Weingarten said, referring to the 1999 hit movie starring Brad Pitt.
"They traveled together, they partied together, they ate together, they went on vacation together and they shared information together," Weingarten said. "We call them the clique."
Weingarten also said that the Level Global fund, which Chiasson founded with his former boss David Ganek in 2003, placed a "huge emphasis on research" and every trade was backed up by a transparent investment theory. Ganek has not been accused of any wrongdoing.
The defendants face one count each of conspiracy to commit securities fraud and multiple counts of securities fraud. If convicted, they could face at least 25 years in prison.
The judge overseeing the case, Richard Sullivan, has denied repeated requests by the defendants to be tried separately.
Level Global was shut down in early 2011 following an FBI raid. Diamondback, which settled civil charges and entered into a non-prosecution agreement with the Justice Department, continues to operate.
Jon Horvath, a former analyst at a division of SAC Capital, the hedge fund founded by Steven Cohen, was arrested along with Newman and Chiasson. Horvath, a technology sector analyst, pleaded guilty in September to insider trading charges and agreed to cooperate with prosecutors.
Tuesday's trial, which could last more than five weeks, follows the sentencing last month of onetime Wall Street luminary Rajat Gupta on insider trading charges.
Gupta was found guilty of leaking Goldman Sachs boardroom secrets to his friend Raj Rajaratnam and sentenced to two years in prison. Rajaratnam, founder of the Galleon Group hedge fund, received an 11-year prison sentence last year, one of the longest ever for insider trading.
The case is US v. Todd Newman et al, U.S. District Court for the Southern District of New York, No. 12-cr-121.
(Reporting By Basil Katz; Editing by Ciro Scotti)