SEC GETS JUDGMENTS ON CONSENT AGAINST DIAMONDBACK CAPITAL MANAGEMENT LLC

FROM:  SEC 
April 10, 2012
SEC v. Spyridon Adondakis et al., Civil Action 12-CV-0409 (SDNY)(HB)
SEC Obtains Final Judgments on Consent against Diamondback Capital Management LLC
The SEC announced that the Honorable Harold Baer, Jr., United States District Judge, United States District Court for the Southern District of New York, entered a Final Judgment on Consent as to Diamondback Capital Management LLC (“Diamondback”) on April 6, 2012, in the SEC’s insider trading case, SEC v. Spyridon Adondakis et al., Civil Action 12-CV-0409 (SDNY) (HB).

The SEC filed its complaint on January 18, 2012, charging two multi-billion dollar hedge fund advisory firms – including Diamondback – as well as seven fund managers and analysts involved in a $78 million insider trading scheme based on nonpublic information about Dell’s quarterly earnings and other similar inside information about Nvidia Corporation.

The SEC’s complaint alleged that in 2008 and 2009, Jesse Tortora, an analyst at Diamondback, obtained inside information about quarterly earnings reports of both Dell and Nvidia and passed that information to Todd Newman, a Diamondback portfolio manager, who used the information to execute trades on behalf of hedge funds managed by Diamondback. These illegal trades in Dell and Nvidia securities resulted in millions of dollars in illicit gains for Diamondback.

The Final Judgment against Diamondback: (1) permanently enjoins the firm from violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), and Exchange Act Rule 10b-5; and (2) orders it to pay disgorgement of $5,173,000 plus pre-judgment interest of $832,751.35, for a total of $6,005,751.35, provided that the amount Diamondback owes would be credited, dollar for dollar, by amounts paid pursuant to a non-prosecution agreement between Diamondback and the U.S. Attorney’s Office for the Southern District of New York; and (c) orders it to pay a civil penalty in the amount of $3,000,000.

SEC CIVIL ACTION AGAINST INSIDE TRADERS GUPTA AND RAJARATNAM

The following excerpt is from the SEC website: “On October 26, 2011, the Securities and Exchange Commission charged former McKinsey & Co. global head Rajat K. Gupta with insider trading for illegally tipping convicted hedge fund manager Raj Rajaratnam while serving on the boards of Goldman Sachs and Procter & Gamble (P&G). The SEC also filed new insider trading charges against Rajaratnam after first charging him with insider trading in October 2009. According to the SEC’s complaint filed in federal court in Manhattan, Gupta illegally tipped Rajaratnam with insider information about the quarterly earnings of both Goldman Sachs and P&G as well as an impending $5 billion investment in Goldman by Berkshire Hathaway at the height of the financial crisis. Rajaratnam, the founder of Galleon Management who was recently convicted of multiple counts of insider trading in other securities stemming from unrelated insider trading schemes, allegedly caused various Galleon funds to trade based on Gupta’s inside information, generating illicit profits or loss avoidance of more than $23 million. The SEC’s complaint alleges that Gupta provided his friend and business associate Rajaratnam with confidential information learned during board calls and in other communications and meetings relating to his official duties as a director of Goldman and P&G. Rajaratnam used the inside information to trade on behalf of certain Galleon funds, or shared the information with others at his firm who caused other Galleon funds to trade on it ahead of public announcements by the firms. During this period, Gupta had a variety of business dealings with Rajaratnam and stood to benefit from his relationship with him. According to the SEC’s complaint, Gupta while serving as a Goldman board member tipped Rajaratnam about Berkshire Hathaway’s $5 billion investment in Goldman and Goldman’s upcoming public equity offering before that information was publicly announced on Sept. 23, 2008. Based on this inside information, Rajaratnam arranged for Galleon funds to purchase more than 215,000 Goldman shares. Rajaratnam later informed another participant in the scheme that he received the tip on which he traded only minutes before market close. Rajaratnam caused the Galleon funds to liquidate their Goldman holdings the following day after the information became public, making illicit profits of more than $800,000. The SEC also alleges that Gupta tipped Rajaratnam to inside information about Goldman’s positive financial results for the second quarter of 2008. There was a flurry of calls between Gupta and Rajaratnam on the evening of June 10, 2008, after Gupta learned from Goldman CEO Lloyd Blankfein of the firm’s quarterly earnings results, which were significantly better than analyst consensus estimates. The following morning, minutes after the markets opened, Rajaratnam caused Galleon funds to start purchasing Goldman securities including 7,350 out-of-the-money Goldman call options and 350,000 Goldman shares. Rajaratnam liquidated these positions on or around June 17 – the date when Goldman announced its quarterly earnings – generating illicit profits of more than $18.5 million for the Galleon funds. The SEC’s complaint further alleges that Gupta tipped Rajaratnam with confidential information that Gupta learned during an Oct. 23, 2008, board posting call about Goldman’s impending negative financial results for the fourth quarter of 2008. Mere seconds after the board call ended, Gupta tipped Rajaratnam, who then arranged for certain Galleon funds to begin selling their Goldman holdings shortly after the financial markets opened the following day until the funds finished selling off their holdings, which had consisted of more than 150,000 shares. In discussing trading and market information that day with another participant in the insider trading scheme, Rajaratnam explained that while Wall Street expected Goldman to earn $2.50 per share, he heard the prior day from a Goldman board member that the company was actually going to lose $2 per share. As a result of Rajaratnam’s trades based on inside information provided by Gupta, the Galleon funds avoided losses of more than $3.6 million. The SEC’s complaint additionally alleges that Gupta illegally disclosed to Rajaratnam inside information about P&G’s financial results for the quarter ending December 2008. Gupta participated in a telephonic meeting of P&G’s Audit Committee at 9 a.m. on Jan. 29, 2009, to discuss the planned release of P&G’s quarterly earnings the next day. A draft of the earnings release, which had been mailed to Gupta and the other committee members two days before the meeting, indicated that P&G’s expected organic sales would be less than previously publicly predicted. Gupta called Rajaratnam in the early afternoon on January 29, and Rajaratnam shortly afterwards informed another participant in the insider trading scheme that he had learned from a contact on P&G’s board that the company’s organic sales growth would be lower than expected. Galleon funds then sold short approximately 180,000 P&G shares, making illicit profits of more than $570,000. The SEC’s complaint charges each of the defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933. The complaint seeks a final judgment permanently enjoining the defendants from future violations of the above provisions of the federal securities laws, ordering them to disgorge on a joint and several basis their ill-gotten gains plus prejudgment interest, and ordering them to pay financial penalties. The complaint also seeks to permanently prohibit Gupta from acting as an officer or director of any registered public company, and to permanently enjoin him from associating with any broker, dealer or investment adviser. The SEC previously instituted an administrative proceeding against Gupta for the conduct alleged in today’s enforcement action, but later dismissed those proceedings while reserving the right to file an action against Gupta in federal court. The SEC previously charged Rajaratnam and others in the widespread insider trading investigation centering on Galleon, the multi-billion dollar New York hedge fund complex founded and controlled by Rajaratnam. The SEC has now charged 29 defendants in its Galleon-related enforcement actions, which have alleged widespread and repeated insider trading at numerous hedge funds, including Galleon, and by other professional traders and corporate insiders in the securities of more than 15 companies. The insider trading generated illicit profits totaling more than $90 million.”.

ALLEGED INSIDE TRADER SETTLES WITH SEC

The following is a case below is an excerpt from the SEC website: “July 20, 2011 On July 19, 2011, the Securities and Exchange Commission filed a settled civil action in the United States District Court in New York City against Robert Doyle. The Commission alleges that Doyle unlawfully traded in securities of Brink’s Home Security. According to the Commission, between August 2009 and December 2009, Doyle misappropriated material nonpublic information showing that Tyco International, Ltd. had offered to acquire Brink’s. On the basis of this information, Doyle purchased Brink’s common stock and call options. Doyle earned $88,555 from his illegal trading in Brink’s securities. Without admitting or denying the complaint’s allegations, Doyle has agreed to settle the Commission’s charges by consenting to entry of a final judgment permanently enjoining him from violating Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder, and ordering him to pay a $44,277.50 civil penalty, $88,555 in disgorgement and $4,288.66 in prejudgment interest.”