Broadband Research LLC founder John Kinnucan, charged with insider-trading in a crackdown on illegal tipping 16 months after he publicly declared his refusal to cooperate with the FBI, will plead guilty in New York federal court, a person familiar with the case said.
Kinnucan was indicted in February, accused of passing inside information to clients at two unidentified hedge funds about SanDisk Corp (SNDK), F5 Networks Inc. (FFIV) and OmniVision Technologies Inc. (OVTI) He was charged with two counts of conspiracy and two counts of securities fraud in a scheme to obtain nonpublic information about technology companies for his clients that operated from 2008 to 2010. He is to plead guilty today, said the person, who declined to be identified because the matter isn’t public.
Prosecutors in the office of Manhattan U.S. Attorney Preet Bharara alleged that Kinnucan “befriended” employees of public technology companies, obtained nonpublic information from them and passed them to his fund manager clients.
He paid his sources in a variety of ways, prosecutors said, “including paying for their meals at high-end restaurants and shipping them expensive food, providing them with confidential information about other technology companies and industry trends and providing them stock trading advice and tips.”
Kinnucan announced in October 2010 that he had refused a request by FBI agents in New York to wear a wire and inform on his fund manager clients, a move that presaged more than dozen insider-trading arrests made during the federal initiative by Bharara’s office and the Federal Bureau of Investigation in New York, known as “Perfect Hedge.”
“Today, two fresh-faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information,” Kinnucan said in an e-mail he sent warning his clients in late 2010. “We obviously beg to differ, so have therefore declined the young gentlemen’s gracious offer to wear a wire and therefore ensnare you in their devious web.”
“Am I a target? Yeah, absolutely,” Kinnucan said in a July 8, 2011, interview, adding he expected to be arrested.
“There’s a saying that the government indicts who they investigate, so I have always assumed that I was a target.”
Kinnucan denied he ever received illegal tips on companies, and insisted the kind of information he provided hedge fund clients was publicly available.
Ellen Davis, a spokeswoman for Bharara, declined to comment on a plea. Kinnucan’s lawyer, Jennifer Brown, didn’t immediately return calls seeking comment. Martin Feely, a supervisory special agent with the FBI’s New York office, didn’t immediately return a voice-mail message left at his office after business hours seeking comment about Kinnucan’s case.
‘Campaign’ of Threats
Prosecutors alleged that during the more than year that elapsed between the approach by FBI agents and his arrest, he’d engaged in a “campaign” of threats and anti-Semitic rants.
They argued Kinnucan posed a danger to the community and a threat to authorities handling his case, citing at least 24 menacing voice-mail messages he left after hours at the office phones of federal prosecutors and FBI agents and also at the homes of two cooperating witnesses.
Batts said that while his comments were “vile” and “filthy,” she didn’t see it as a direct threat and ruled that he could be released on bond.
According to prosecutors, Kinnucan made numerous representations to Broadband clients, telling them that none of the information he obtained came from insiders at public companies, that he didn’t pay any of his sources and that his tips had been reviewed and approved by a compliance attorney in San Francisco.
The unidentified insiders who conspired with Kinnucan included employees at Flextronics International Ltd. (FLEX), F5 Networks and SanDisk, prosecutors said.
Donald Barnetson, a former executive at Milpitas, California-based SanDisk, pleaded guilty in federal court in New York on Feb. 17 and said he conspired with Kinnucan and passed on inside information about his company.
Walter Shimoon, a former Flextronics manager, pleaded guilty in federal court in July and claimed he passed inside information to Kinnucan while working as a consultant for Broadband Research. He said he was paid a total of $27,500 for passing tips about his company, OmniVision Technologies, Apple Inc. and Cisco Systems Inc. (CSCO)
While neither man was named in the indictment of Kinnucan, both are cooperating with the probe of insider trading by fund managers, expert networking consultants and employees of publicly-traded technology companies by the Federal Bureau of Investigation in New York and Bharara’s office.
Prosecutors alleged that Kinnucan tipped several of his Broadband clients after he obtained information from an F5 Networks insider that the company was going to beat analysts’ estimates in July 2010. At least two of Kinnucan’s clients executed trades in F5 Networks stock, either earning profits or avoiding losses totaling more than $1.5 million, prosecutors said.
Securities fraud carries a maximum term of 20 years in prison while conspiracy carries a term of as long as five years in prison. Kinnucan’s plea hearing is scheduled for 11:30 a.m.
The case is U.S. v. Kinnucan, 12-cv-163, U.S District Court, Southern District of New York (Manhattan).
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