Expert-Network Founder Who Refused FBI Wire Expects Arrest

Photographer: Stephen Yang/Bloomberg

Robert Khuzami, director of the division of enforcement for the Securities and Exchange Commission (SEC), speaks at a news conference with Preet Bharara, U.S. attorney for the Southern District of New York, right, and Janice Fedarcyk, assistant director-in charge of the Federal Bureau of Investigation's (FBI) New York office, second from left, to announce insider trading charges against three portfolio managers and one hedge fund analyst in New York, on Tuesday, Feb. 8, 2011. Close

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Photographer: Stephen Yang/Bloomberg

Robert Khuzami, director of the division of enforcement for the Securities and Exchange Commission (SEC), speaks at a news conference with Preet Bharara, U.S. attorney for the Southern District of New York, right, and Janice Fedarcyk, assistant director-in charge of the Federal Bureau of Investigation's (FBI) New York office, second from left, to announce insider trading charges against three portfolio managers and one hedge fund analyst in New York, on Tuesday, Feb. 8, 2011.

John Kinnucan, the expert-networking firm founder whose public refusal of an FBI request to wear a wire presaged a dozen insider-trading arrests, said he expects to be charged himself.

Kinnucan, who runs Broadband Research LLC in Portland, Oregon, may have good reason to fear the worst. Federal prosecutors in New York disclosed in court papers that they had a court-authorized wiretap on his mobile phone in connection with their case against Donald Longueuil, a former SAC Capital Advisors LP portfolio manager who pleaded guilty to insider- trading charges on April 28 in Manhattan federal court.

Walter Shimoon, a former Flextronics International Ltd. (FLEX) executive who pleaded guilty July 5 in federal court in New York, said during his plea hearing that he had given Kinnucan confidential nonpublic information about his own company, as well as OmniVision Technologies Inc. (OVTI), Apple Inc. (AAPL) and Cisco Systems Inc. (CSCO)

“Am I a target? Yeah, absolutely,” Kinnucan said in a telephone interview. “There’s a saying that the government indicts who they investigate, so I have always assumed that I was a target.”

Longueuil, Shimoon and Kinnucan have been swept up in the biggest insider-trading investigation in a generation, one that has implicated hedge funds, technology firms and expert networking firms like Broadband. Kinnucan denied he ever received illegal tips on companies, and insisted the kind of information he provided hedge fund clients was publicly available.

Approached by Feds

In October, he sent an e-mail saying he had been approached by federal agents who asked him to record conversations with an unidentified money manager. The message was sent to about 50 recipients, including clients such as Wellington Management Co. in Boston, Janus Capital Group Inc. (JNS) in Denver and SAC in Stamford, Connecticut.

Kinnucan, 54, said he doesn’t know why the government would focus on him, saying his research was “entirely in line” with standard industry practices. “This was industry gossip,” he said of his work.

“The stuff we talked about you can find every day, publicly, on the Internet,” he said, citing numerous examples of the kind of data, called “channel checks” he provided clients.

‘Publicly Available’

Kinnucan gave several examples of such information that’s publicly available, including a report about Apple Inc.’s iPhone production for the second quarter of this year, published on Briefing.com. He said this was the type of data he provided after research.

“Some people have to get off the ‘perp walk’ and look at what I actually do,” he said. “It’s publicly available information.”

Kinnucan disputed Shimoon’s statements in court, saying he never covered his company, insisting, “None of my clients cared one iota about Flextronics.”

“I have e-mails from my clients saying ‘This Apple stuff is worthless’ and clients saying ‘This OmniVision stuff is worthless’ and that ‘Walter Shimoon doesn’t know what he’s talking about, it’s a joke.’”

Expert Networking

Expert-networking firms connect investors with industry experts who provide insight into a specific market. The office of Manhattan U.S. Attorney Preet Bharara has charged more than a dozen people in its crackdown on the industry, part of the larger insider-trading probe. Bharara has said the defendants crossed the line from giving industry insight to illegally passing secret information.

“They’re trying to criminalize standard industry practices here,” Kinnucan said. “The kind of information I provide to my clients is exactly what is provided by large investment banks.”

During his plea before U.S. District Judge Jed Rakoff, Shimoon said he’d provided “specific production schedules and forecasts for Flextronics customers and about its suppliers like OmniVision, which produced camera sensors.”

Shimoon said that, at the time, he was working as a paid consultant for Broadband, which Kinnucan opened in 1999, as well as Mountain View, California-based Primary Global Research LLC, another expert-networking firm.

Primary Global

Shimoon said Primary Global paid him about $200 an hour and that he had earned a total of $18,000 from the company for passing secret tips to hedge fund managers. Shimoon said he got more than $27,000 from Kinnucan’s firm.

Assistant Manhattan U.S. Attorneys Antonia Apps and Katherine Goldstein said in court filings that Shimoon engaged in a conspiracy to commit securities fraud from 2008 to 2010.

The crime was committed “in connection with Shimoon providing material, nonpublic information to John Kinnucan, Broadband Research, and, indirectly, to Broadband Research’s clients, including money managers,” the government said in court papers.

Kinnucan hasn’t been charged with a crime. Ellen Davis, a spokeswoman for Bharara, declined to comment.

Of the 14 people charged since November in the expert networking investigation, which includes fund managers and technology company employees, 12 have pleaded guilty. One person, Winifred Jiau, a former Primary Global consultant, was convicted after a trial last month. James Fleishman, a Primary Global sales executive, pleaded not guilty and is scheduled to go on trial in August.

Listened In

The U.S. said it also listened in on conversations that Kinnucan had with former SAC hedge fund manager Longueuil, who had been scheduled to face trial with Jiau before pleading guilty to conspiracy and securities fraud.

Longueuil told Rakoff that, while researching technology firms for two hedge funds, he conspired to obtain inside information on Marvell Technology Group Ltd. (MRVL) He told the court that he conspired with Samir Barai, founder of Barai Capital Management LP.

He said during his plea that after he read a newspaper article on Nov. 19 about the insider-trading probe by Bharara’s office that also mentioned Kinnucan and his numerous fund clients, Longueuil admitted going to his office at 2 a.m., taking pliers to two external drives of his computer and destroying them.

‘Chopped up Everything’

He then said he walked 20 blocks, dumping the parts in four separate garbage trucks around New York City.

“Chopped it up, chopped up everything,” Longueuil wrote in a text to Freeman, according to the complaint filed by Bharara’s office in February.

Longueuil and Barai were charged in February along with Jason Pflaum, an analyst at Barai’s firm, and Noah Freeman, another ex-portfolio manager at SAC, the hedge fund firm founded and run by Steven A. Cohen.

Barai, Freeman and Pflaum have pleaded guilty. SAC has said it’s cooperating with the U.S. investigation. Freeman testified at Jiau’s trial that he circumvented SAC’s policies prohibiting insider trading.

Kinnucan said he was aware he was being wiretapped.

He said he asked Freeman to introduce him to Barai to see if Barai’s fund would hire Broadband as a consultant.

“They wouldn’t give me the time of day,” Kinnucan said of Barai’s firm. “I didn’t have what I felt they wanted, which was material, nonpublic information.”

Decided Against Firm

At Jiau’s trial, when asked if Kinnucan had ever passed inside information to Barai Capital, Pflaum testified he and Barai had reviewed Kinnucan’s marketing material and decided not to hire his firm.

The evidence gathered against Longueuil included “recordings of telephone calls between John Kinnucan and Donald Longueuil, which were intercepted over a wiretap on John Kinnucan’s telephone,” Assistant Manhattan U.S. Attorneys Avi Weitzman and David Leibowitz said in court papers.

Kinnucan’s firm provides research on technology companies to hedge funds and mutual funds. In his e-mail last year to clients, he said Federal Bureau of Investigation agents asked him to secretly tape a conversation with a fund manager who he didn’t name that was being targeted by prosecutors.

Not Longueuil

Asked July 5, Kinnucan said the fund manager wasn’t Longueuil. “No, absolutely not,” he said.

Kinnucan also said he would never assist the government.

“Cooperate? Absolutely not, and I never will.”

In their case against Longueuil, prosecutors said in court filings that they amassed “applications, court orders and periodic reports authorizing wiretaps over a cellular telephone” subscribed to Kinnucan.

“This is very significant that the government not only saw a person likely to be engaging in criminal conversation but thought the conversations were valuable enough to spend a lot of time and resources monitoring him,” said Dan Richman, a professor at Columbia Law School and a former federal prosecutor in New York.

Wiretaps were used to win convictions this year in two other insider trading cases brought by Bharara’s office as part of the national probe -- those of Galleon Group LLC hedge fund co-founder Raj Rajaratnam and former Galleon trader Zvi Goffer.

To obtain court approval for real-time surveillance of a telephone, the U.S. must show that there is probable cause that crimes are being committed on a particular line, Richman said.

‘Of Deep Interest’

Intercepts on a telephone “suggests that Kinnucan was of deep interest to the government,” Richman said.

Once approved, a wiretap must be monitored 24 hours a day and turned off when agents determine calls aren’t pertinent to the investigation, Richman said. Every 10 days, federal authorities must submit reports on the progress of the wiretap.

“There is a great deal of scrutiny, and these wiretap affidavits go on for sometimes 50 pages,” Richman said. “A prosecutor has to set out that there is probable cause that crimes are being committed,” he said, adding, “And they have to show that they’re pursuing other investigative means and that it’s necessary to do a wiretap.”

Nathaniel Burney, a lawyer for Kinnucan, said his client didn’t do anything wrong. He declined to comment whether he expects his client to be charged or whether he’s been notified by the government.

“It doesn’t look like he did anything wrong from the information I have,” Burney said. “I think it would be a mistake to charge him.”

The case is U.S. v. Walter Shimoon, 11-cr-00032, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Patricia Hurtado in Manhattan federal court at phurtado@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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