Hedge Fund Trader Sentenced to 4 1/2 Years in Insider Case

It is a scene that has played out over and over again at the federal courthouse in Lower Manhattan.

A once high-flying hedge fund trader stands before a judge, oftentimes apologizing for his misdeeds. A high-priced defense lawyer asks for leniency, arguing that the client â€" other than his insider trading crimes â€" has lived an otherwise admirable life. After listening intently, the judge rejects those pleas and sends the defendant to prison.

Todd Newman became the latest in a parade of Wall Street traders â€" along with a smattering business executives, management consultants and corporate lawyers â€" who has gone through this routine and had their life upended by the government’s crackdown on insider trading.

In his almost five years trading technology stocks at Diamondback Capital Management, Mr. Newman, 48, earned more than $10 million.

On Thursday, he received a four and a half year prison sentence.

“This is a crime that has an impact across an economy and across a society,” said Judge Richard J. Sullivan, who presided over Mr. Newman’s trial and handed down the sentence. “This was a stark crossing of the line, engaging in criminal conduct, and that’s just wrong.”

Last December, a jury convicted Mr. Newman and another former hedge fund trader, Anthony Chiasson, co-founder of Level Global Investors, of a conspiring with six others to earn about $70 million illegally trading technology stocks. Much of the charges centered on trading in shares of Dell based on secret financial information obtained from an insider at the computer company.

Both Diamondback and Level Global, which are now defunct, have ties to SAC Capital Advisors, the giant $14 billion hedge fund run by the billionaire investor Steven A. Cohen that has become a focus of the government’s insider trading inquiry. SAC Capital alumni started both firms.

Former SAC employees were also charged as part of the conspiracy involving Mr. Newman. Jon Horvath, a former tech-stock analyst, pleaded guilty last year to illegally trading in Dell and Nvidia, a chipmaker. And federal prosecutors last month arrested Mr. Horvath’s boss, Michael S. Steinberg, and charged him with being part of the conspiracy. Mr. Steinberg has pleaded not guilty.

Mr. Cohen has not been charged with any wrongdoing and has said that he behaved appropriately at all times. On Thursday, SAC announced several measures to beef up its legal and compliance effort, including clawing back pay for employees that break the law.

Diamondback, a Stamford, Conn.-based hedge fund that shut down last year, is seeking millions of dollars in restitution from Mr. Newman, characterizing itself as a victim of his crimes. The divorced father of a 12-year-old daughter, Mr. Newman lives in Needham, Mass., a low-key Boston suburb. He built a successful career specializing in investing in technology stocks. Before joining Diamondback in 2006, he worked at Tudor Investment, one of the world’s most prominent hedge funds.

Describing him as a “good, honorable and decent human being,” Mr. Newman’s lawyer made his case for a light sentence. “This is not who he is,” said the lawyer, John Nathanson. “His reputation has been decimated.”

The sentence was less than the as much as six and a half years that federal prosecutors had sought. Judge Sullivan also imposed about $1.75 million in fines and forfeiture.

Mr. Newman is one of 81 individuals charged by the United States attorney in Manhattan since 2009. Of those, 73 have either pleaded guilty or been convicted by a jury, and 48 of those have already been sentenced.

The vast majority of the insider-trading defendants have confessed instead of fighting the charges. Just 10 have taken their cases to trial, and all of them have been found guilty.

Mr. Steinberg and another former SAC portfolio manager, Mathew Martoma, could test the government’s perfect trial record. Mr. Martoma was indicted in December on charges that he corrupted a doctor to leak him secret data about a clinical drug trial that allowed SAC to earn profits and avoid losses of $276 million.

Both Mr. Martoma and Mr. Steinberg have refused to cooperate with the government in helping them build a potential case against their former boss, Mr. Cohen. Their trials are not yet set, but are likely to not start until at least early 2014.

Meanwhile, SAC has settled a pair of civil lawsuits â€" one for $602 million, one for $14 million â€" that was brought against the firm by securities regulators related to Mr. Martoma’s and Mr. Steinberg’s cases.

During Thursday’s sentencing of Mr. Newman, Judge Sullivan, who has presided over a number of the insider trading cases, said he grappled with the question of why so many Wall Street executives have committed this crime. He compared Mr. Newman and others to less-fortunate defendants, like one he had recently sentenced who grew up in dire poverty in the Dominican Republic and turned to a life of crime.

“I’m not excusing that, but one could see how those circumstances would push one to the dangers of criminal activity,” the judge said. “But it is hard to understand why someone who has reached the pinnacle of success,” he added, “would risk all that for more.”