Jason Pflaum, a former Barai Capital Management LP analyst, told jurors he destroyed data his firm got from so-called expert networkers after Galleon Group LLC co- founder Raj Rajaratnam was arrested on insider trading charges.
Pflaum testified yesterday in federal court in Manhattan during the trial of Winifred Jiau, 43, the former Primary Global Research LLC consultant charged with illegally passing tips about Nvidia Corp. (NVDA) and Marvell Technology Group Ltd. (MRVL) to hedge fund managers, including Pflaum’s former boss, Samir Barai.
Under questioning by Jiau’s lawyer, Joanna Hendon, Pflaum, 38, said at least eight people provided Barai with nonpublic information about technology companies, including Mark Anthony Longoria, a former employee of Advanced Micro Devices Inc. (AMD) Pflaum said he destroyed the files related to those tippers without deleting files related to Jiau.
“What caused you to delete the files?” Hendon asked.
“The context was the Galleon case,” Pflaum said. “There was some discussion internally post-Galleon. There was more sensitivity to over-the-line business. More of a concern internally of who we could be talking to that was over the line.”
Hendon asked Pflaum if Barai was concerned that the U.S. was investigating his firm. Barai pleaded guilty on May 28 to conspiracy to commit securities and wire fraud, as well as to charges of wire fraud and obstruction. Longoria, who has been charged by the U.S., is in plea talks, his lawyer, Jonathan Marks, has said.
Pflaum said his boss wasn’t worried after Rajaratnam and five others were arrested in October 2009.
“The gist of the conversation was ‘let’s clean up some of our contacts that are questionable,’” Pflaum said. “I don’t think there was any major concern. They just wanted to make sure I got rid of them.”
Pflaum testified he decided to secretly cooperate with the U.S. after Federal Bureau of Investigation agents approached him in October 2010. He continued to work for Barai until he pleaded guilty in January and testified he wore a wire during this period.
“That was a betrayal of Mr. Barai?” Hendon asked.
“You could say that,” he said.
“What would you say, Mr. Pflaum?”
“In my view, it was starting to tell the truth, being helpful and doing the right thing,” Pflaum said.
Pflaum didn’t record his conversations with Barai, he said.
Jiau is the first of the expert networkers, who provide industry information to financial company clients, to go to trial on federal charges of securities fraud and conspiracy. She faces as long as 25 years if convicted.
During his plea, Barai admitted instructing analysts to destroy evidence after he saw a November news article describing a federal grand jury investigation of hedge fund managers who used expert networking consultants to get inside information.
Pflaum, who worked for Barai from March 2008 to January 2011, has testified that he gave the U.S. information on “more than 10” people who he said committed insider trading.
Assistant U.S. Attorney David Leibowitz placed a stack of e-mails of one alleged tipper, who fund managers nicknamed “10- K” because his information was complicated like a company’s 10- K filing. He asked Pflaum to rate the quality of inside information which 10-K provided compared with Jiau’s.
“Generally speaking, there is no comparison,” Pflaum said. “The information was spot on.”
“Whose information?” U.S. District Judge Jed Rakoff asked.
“The information from Winnie,” Pflaum said. “It was incredibly specific, while 10-K’s never touched it. She had operating margins, earnings per share, metrics that were never found in 10-K’s data.”
Leibowitz asked Pflaum to rank for the jury the level of providers of inside information, including Jiau, who gave data about companies to Barai Capital.
“On a relative basis, Winnie was at the top,” Pflaum said. The other eight people he mentioned, including Longoria ranked below her in accuracy and detail.
Hendon, in her opening statement to the jury, said the nonpublic information that Jiau passed to Barai wasn’t “material,” meaning it wasn’t something a reasonable investor would consider important in trading and wouldn’t have a bearing on the stock price.
Leibowitz yesterday asked Pflaum whether he knew Barai Capital executed trades in Marvell after Jiau passed tips about the company during a May 2008 telephone conversation.
“I do,” Pflaum said. “The trader sat very close to me. There’s no doubt a position was built,” he said. “I know for a fact that it took place.”
Pflaum said he didn’t know how many trades the fund executed in Marvell or the amount of money that it invested in the company’s stock.
Hendon asked Pflaum whether Broadband Research LLC founder John Kinnucan provided inside information to Barai.
“I don’t recall specifically,” Pflaum said. “We reviewed his model. He was really trying to get us as a client. I don’t recall him giving us any great information per se.”
Broadband Research provides research on technology companies to hedge funds.
Nathaniel Burney, Kinnucan’s lawyer, said yesterday in a phone interview that his client “never provided any inside information at all.”
Prosecutors said in an April 6 letter that Kinnucan, who hasn’t been accused of any wrongdoing, was subpoenaed by the government.
The case is U.S. v. Jiau, 11-cr-00161, U.S. District Court, Southern District of New York (Manhattan).
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