Prosecutors Seek At Least Five Years For Ex-Diamondback Trader

Apr 29 2013 | 12:36pm ET

Prosecutors aren't impressed by convicted insider-trader Todd Newman's argument that he did not personally profit from the scam—and have asked a federal judge to send him to prison for at least five years.

In a letter to U.S. District Judge Richard Sullivan, prosecutors pushed for the prison term called for by federal sentencing guidelines, between 63 and 78 months, when he imposes sentence on May 2. Newman, a former portfolio manager at Diamondback Capital Management, was convicted in December of securities fraud and conspiracy.

Prosecutors also backed Diamondback's efforts to win $39 million from Newman, most of it lost management fees. The hedge fund suffered $1.3 billion in redemptions after it was raided in November 2010 as part of the probe into Newman's illegal trading, and eventually was forced to close its doors.

Prosecutors said that Diamondback was a victim of Newman's fraud, but that the firm had not established that it is entitled to the $26 million management fee restitution, a judgment that will be left to Sullivan. The defunct hedge fund is also seeking $10.2 million in legal fees, $2.5 million in compensation paid to Newman and $2.3 million to cover the costs incurred producing documents for the federal probe.

Newman earlier this month sought leniency, with his lawyers arguing that he personally received only $442,761 from the $72 million scheme. But prosecutors said it wasn't about Newman's earnings—which they put at $4 million—alone.

"The fraudulent scheme was far more extensive than simply illicit trading in two stocks," prosecutors wrote. "The sophistication of the insider-trading scheme in this case lay in the fact that the portfolio managers could obtain the benefit of having access to a network of company insiders without having to communicate directly." And they noted that Newman had authorized at least one payment to a source for confidential information.

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