Hedge fund paying $9M; won't be prosecuted

AP News

1/23/2012 2:59:56 PM - AP News

A hedge fund named in a massive insider-trading case will pay $9 million in settlements but won't be prosecuted by the Justice Department because it is cooperating in the government's investigation.

Diamondback Capital Management agreed to pay a $3 million fine to settle civil insider-trading charges filed by the Securities and Exchange Commission, the SEC said Monday. The agency had accused Diamondback of insider trading in shares of Dell Inc. and Nvidia Corp. in 2008 and 2009.

The hedge fund also will forfeit $6 million in alleged illegal profits in an agreement with the Justice Department. The department won't prosecute Diamondback, based in Stamford, Conn., as long as it continues to cooperate.

The government unveiled the case last week, charging a co-founder of hedge fund Level Global Investors with engineering a trade that netted a stunning $53 million in profits. The SEC said the case involved closely linked traders at Diamondback and Level Global, based in Greenwich, Conn.

Preet Bharara, the U.S. attorney in Manhattan, said in announcing the case that at least seven financial industry professionals were involved in the $78 million scheme. Of that amount, nearly $62 million was earned through tips provided by a Dell employee to a former Dell worker who spread the information among his friends in at least five investment firms, including three hedge funds, Bharara said. He called the scheme "a stunning portrait of organized corruption on a broad scale."

The settlement with Diamondback "appropriately sanctions the misconduct while giving due credit to Diamondback for its substantial assistance in the government's investigation," George Canellos, director of the SEC's regional office in New York, said in a statement.

In a statement of facts submitted to the SEC and the Justice Department, Diamondback said that a former portfolio manager and a former analyst at the hedge fund "routinely violated" the fund's policy on employee contacts with consultants who may have confidential information on companies. The portfolio manager and the analyst traded stocks while they had information they had received as a result of violating the policy, the statement said.

In a letter to investors Monday, Diamondback officials said a review by the firm's outside lawyers had found misconduct by the two former employees but "no evidence establishing improper trading by any other Diamondback employee." The results of the review were shared with the government, the letter said.

"We are gratified finally to have reached closure on the government proceedings," it said.