Danielle Chiesi, the former New Castle Funds LLC consultant charged with passing inside information to Galleon Group LLC co-founder Raj Rajaratnam and others, pleaded guilty in federal court in New York.
Chiesi, 45, recorded on federal wiretaps cursing and fretting about getting caught, was arrested with Rajaratnam, 53, in October 2009 in the biggest U.S. crackdown on insider trading by hedge funds.
She pleaded guilty today to three counts of conspiracy to commit securities fraud during a proceeding before U.S. District Judge Richard J. Holwell in Manhattan federal court, without naming Rajaratnam or other co-conspirators. Chiesi said the insider-trading scheme operated from Oct. 14, 2008, through Jan. 31, 2009, was based on tips she received from insiders at public companies.
“I on occasion obtained what I thought to be material, non-public information about IBM, AMD and Sun Microsystems,” Chiesi told Holwell. “I understood that this person was obtaining that information in violation of his fiduciary duty.”
Chiesi said she passed these tips to others involved in the conspiracy.
She told the judge she conspired and shared this information with “my boss at New Castle,” whom she didn’t name in court. Mark Kurland, the hedge fund’s founder, who supervised Chiesi, pleaded guilty in January 2010 to insider trading and was sentenced in May to 27 months in prison.
“I also shared with other people in the hedge fund industry,” Chiesi told the judge. “I agreed with other people to obtain material, non-public information, share it and to trade on it,” she said.
“This guilty plea caused me great pain,” Chiesi said. “I’m deeply ashamed by what I did. That by crossing the line on these occasions I ruined a 20-year career in my field that I truly love and I have been extremely devoted to. I brought disrepute to what is an honorable profession.”
Chiesi faces 37 months to 46 months in prison under federal sentencing guidelines, which aren’t binding on the judge.
Chiesi’s guilty plea brings to more than 15 the number of people admitting guilt in the federal probe by the office of Manhattan U.S. Attorney Preet Bharara.
Of the six people arrested on Oct. 16, 2009 all but Rajaratnam have pleaded guilty.
‘Bad for Rajaratnam’
“The plea is bad for Rajaratnam any way you look at it,” said Stephen Miller, a former federal prosecutor in New York and Philadelphia, who is now a partner in the law firm Cozen O’Connor.
“The plea allows the government to focus all its guns” on Rajaratnam, Miller said.
Chiesi isn’t cooperating with prosecutors in their case against Rajaratnam, her lawyer, Alan Kaufman, said after court.
“She’s not cooperating and they haven’t asked for her cooperation,” Kaufman said. “It’s a straight-up guilty plea.”
Chiesi told Holwell she didn’t take any profits a result of the scheme. When she was indicted, prosecutors said she made more than $4 million on the scheme. In court today, Assistant U.S. Attorney Jonathan Streeter said New Castle gained $1.7 million.
‘Did Not Trade’
“I did not trade on these stocks but I knew what I was doing was wrong,” Chiesi said in court. “I apologize to the court, I take full responsibility,” she said, her voice breaking.
As part of her guilty plea, Chiesi also agreed to forfeit an unspecified amount of money the hedge fund made from the fraud scheme, Kaufman said after court.
Chiesi, who was accompanied to court today by her mother, sister and two teenage nieces, declined comment after the hearing.
“This conduct, which she deeply regrets, was in no way indicative of her 20-year career in the financial industry,” Kaufman said in a statement after court. “She is hopeful that by acknowledging what she did do and what she did not do, she can move on with her life.”
Chiesi’s plea threatens to complicate the defense of Rajaratnam, who has pleaded not guilty to the charges and whose insider-trading trial is scheduled to begin on Feb. 28.
The billionaire Rajaratnam is the central figure in a three-year probe in which more than 20 people have been criminally charged.
The case is the first in which prosecutors and the Federal Bureau of Investigation have made extensive use of the phone tapping techniques used to battle organized crime against significant Wall Street insider-trading scheme.
The Sri Lankan-born Rajaratnam is accused of making more than $40 million in illegal schemes dating back to 2003. Both he and Chiesi were accused of profiting from tips provided by company executives, hedge-fund employees and other insiders.
Jim McCarthy, a spokesman for Rajaratnam, didn’t have an immediate comment.
Kaufman declined comment when asked after court about the timing of Chiesi’s guilty plea.
It follows a Nov. 24 ruling by Holwell that rejected Chiesi’s and Rajaratnam’s bid to bar the use of the wiretap evidence. Holwell permitted prosecutors to present some of the 2,400 conversations that the government secretly recorded of Rajaratnam and more than 130 friends, business associates and alleged accomplices.
On Dec. 10, Holwell ruled Rajaratnam and Chiesi will be tried separately. Chiesi’s trial was to start April 25.
The conversations recorded by the FBI involved “dozens of stocks, dozens of co-conspirators, and a total of seven conspiracies,” which allegedly played out over six years, Holwell said.
Robert Moffat, a former International Business Machines Corp. executive who has pleaded guilty to securities fraud and conspiracy, said he and Chiesi had an “intimate relationship” and claimed Chiesi “played him” to obtain tips that she passed on.
Moffat admitted he leaked Chiesi information about International Business Machines Corp. and Advanced Micro Devices Inc. as well as other companies.
After Rajaratnam’s arrest last year, a prosecutor said that the wiretap recordings show him engaged “in a veritable smorgasbord of insider trading.” The contents of most of the recordings weren’t released to the public.
Prosecutors said Rajaratnam used secret tips from insiders to conduct illegal trades in 12 companies, including Intel, IBM, Akamai Technologies Inc. Google Inc., EBay Inc., Polycom Inc. and Hilton Hotels Corp.
He is charged with five counts of conspiracy and eight counts of securities fraud and faces as long as 185 years in prison if convicted.
Rajaratnam was accused of receiving tips over several years from a network of executives including Chiesi, Khan and Ali Far, a hedge-fund manager. Far and Khan have pleaded guilty to insider trading charges and are cooperating with the U.S.
In one scheme, Rajaratnam allegedly used inside information concerning AMD’s 2008 plan to spin off two of its plants, as well as its 2006 acquisition of Markham, Ontario-based ATI. The spinoff was to occur after AMD got $8.4 billion from the emirate of Abu Dhabi.
Former McKinsey & Co. director Anil Kumar, who pleaded guilty in January, said when he pleaded guilty that he tipped Rajaratnam to talks about the spinoff and the ATI deal, leaking information to Rajaratnam for more than five years in return for $1.75 million.
The Galleon Group probe has expanded since October 2009 to encompass other hedge funds, technology companies and so-called expert-networking firms across the U.S.
The federal crackdown widened late last year with the arrests of workers at technology firms and employees at Mountain View, California-based Primary Global Research LLC, which matches investors with specialists who provide insight into specific markets.
Bharara’s office has charged eight people and three others have pleaded guilty to federal charges. He said in a statement released today that Chiesi’s plea should send a message to professionals who “game the system and who think the rules apply only to everyone else.”
He said his office is continuing to work with the FBI and the U.S. Securities and Exchange Commission to pursue insider trading cases.
The case is U.S. v. Rajaratnam, 1:09-cr-1184, U.S. District Court, Southern District of New York (Manhattan).
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