Mark Kurland, a co-founder of New Castle Funds LLC, was ordered to serve 27 months in prison after pleading guilty in the Galleon Group LLC insider-trading case, becoming the first defendant in the scheme to be sentenced.
Kurland, 61, who pleaded guilty on Jan. 27, was also ordered yesterday in federal court in Manhattan to forfeit $900,000, the profit from one of three illegal trades.
“Mr. Kurland here had a chance as a leader of the financial industry, he could have led by example, instead he chose to follow,” U.S. District Judge Victor Marrero said in court. “He became a joiner, surrendering to a spree of a mob mentality that nearly brought down this country’s financial industry in a search for ever bigger and faster gains.”
Kurland, who lives in Mount Kisco, New York, is among 21 people charged since October in two waves of arrests. Among them are Galleon co-founder Raj Rajaratnam, 52, who is charged with using confidential tips to earn millions of dollars on illegal stock trades, and Danielle Chiesi, whom Kurland supervised at New York-based New Castle. Both deny wrongdoing.
Unlike most others who have pleaded guilty in the case, Kurland isn’t cooperating with prosecutors.
Federal sentencing guidelines recommended that Kurland be sentenced to 30 to 37 months of prison based on the one profitable trade. Two other Kurland trades based on inside information ended in losses.
Defense attorney Patrick Smith sought probation for his client. He urged Marrero to disregard the sentencing guidelines, saying Kurland had a “minor” role in the crime and didn’t profit personally from the illegal trades.
Smith said that Kurland was less culpable than Robert Moffat, a former International Business Machines Corp. executive who pleaded guilty to leaking tips to Chiesi and faces no more than six months behind bars. Chiesi passed along some of the tips to Kurland, Smith said.
“The crime started with Robert Moffat,” Smith said, adding that “fairness” required comparable sentences. Moffat admitted to securities fraud and conspiracy in March and is scheduled to be sentenced in July. He faces six months in prison at most.
Moffat had an “intimate relationship” with Chiesi, prosecutors said in court yesterday during Kurland’s hearing.
Assistant U.S. Attorney Reed Brodsky told Marrero that Kurland was motivated by greed while Moffat had an “intimate relationship” with Chiesi. Brodsky didn’t elaborate, saying he hadn’t intended to discuss Moffat’s case until Smith began focusing on it.
Moffat, who also isn’t cooperating with prosecutors, will seek a sentence of probation, said his lawyer, Kerry Lawrence.
“Mr. Moffat is the least culpable person charged in connection with the entire case,” Lawrence said in a phone interview.
A former 31-year IBM veteran, Moffat admitted in court in March that in 2008 he leaked information to Chiesi about IBM, Lenovo Group Ltd. and Advanced Micro Devices Inc. He said he told Chiesi about disappointing sales of IBM servers, a pending restructuring at AMD and earnings at Lenovo.
Moffat said he learned the information because he served as a non-voting member of Lenovo’s board and because he knew that IBM had been asked by AMD to use a license as part of its restructuring.
Moffat received “no money or other financial benefit” from trades based on inside information, Lawrence said in court when his client pleaded guilty.
Chiesi’s lawyer, Alan Cohen, declined to comment after court yesterday.
With dozens of his friends, family members and investors looking on yesterday, Kurland asked Marrero for leniency.
“I destroyed my reputation, everything I’ve worked so hard for,” Kurland said. “I will continue to suffer regardless of the sentence imposed today.”
Brodsky urged Marrero to “send a message” to Wall Street that insider trading won’t be tolerated, especially when the offender ran a “billion-dollar hedge fund” and was “at the pinnacle” of his profession.
“Some may feel it is a victimless crime. It is not,” Brodsky said. “The victim is the community. It’s everyone who invests in the marketplace.”
Kurland is among 11 people who have pleaded guilty in two Galleon-related cases. At least four of those have agreed to testify against Rajaratnam.
AMD, Akamai, Sun
In his guilty plea to conspiracy and securities fraud, Kurland didn’t name Chiesi, 44, or anyone else. He admitted that he used secret tips when trading in AMD, Akamai Technologies Inc. and Sun Microsystems Inc. while at New Castle from August 2008 to January 2009. The sole profit came in the Sun trade.
Chiesi’s consulting job at New Castle required her to develop sources to generate trading ideas, according to a legal submission by Kurland’s lawyers. Her sources included Moffat and “a contact at Akamai,” Smith wrote.
“Chiesi was an advocate for her trading ideas,” according to the brief. “Regrettably, Mark permitted some of these discussions with Chiesi to go too far. Chiesi gave to Mark what he knew to be misappropriated material non-public information concerning three companies.”
During the summer of 2008, Kurland listened to a phone call between Moffat and Chiesi about a planned restructuring at AMD, Smith said. New Castle’s ensuing trade resulted in a $4.7 million loss. Chiesi told Kurland in September 2008 that her source at Akamai said, incorrectly, that the company would be “taken out” in an acquisition, according to the brief. New Castle lost $1.1 million.
Sun Trading Profit
In January 2009, Moffat gave Chiesi inside information about Sun’s performance, generating a trading profit for New Castle of about $900,000, Smith wrote.
Kurland was recorded on government wiretaps of Chiesi talking about the scheme, according to court papers. In one recording, he is heard encouraging Chiesi to meet more people who would provide tips, according to court filings.
Kurland’s fraud couldn’t be measured merely by net losses or gains, Marrero said. The judge said Kurland’s actions compromised the financial market’s integrity and helped foster “a culture of oblivion” and practices that “contributed significantly to bring about the worst economic collapse in this country since the Great Depression.”
Kurland and other defendants, the judge said “minimize their conduct, they suggest that their roles were really minor, that the gains they made were relatively small, that others are more to blame.”
“Fundamentally, they suggest a perception that the law applies only to the other guy,” Marrero said.
The case is U.S. v. Kurland, 10-cr-69, U.S. District Court, Southern District of New York (Manhattan).