U.S. wants Diamondback's Newman to reimburse hedge fund

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 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 oversaw.

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 conspiracy.

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, prosecutors argued.

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.

(Reporting by Jonathan Stempel in New York; Editing by Martha Graybow and Carol Bishopric)