John Kinnucan, the Broadband Research LLC founder who earlier refused to cooperate in an FBI probe of insider trading, admitted passing illegal tips on companies to hedge-fund clients and obstructing justice.
Kinnucan, 55, who was indicted in February, pleaded guilty yesterday in Manhattan federal court to one count of conspiracy and two counts of securities fraud. He told U.S. District Judge Deborah Batts that he both obtained and gave tips to clients of his expert-networking firm, including two in New York.
“From approximately 2008 to 2010 I worked with others to obtain material nonpublic information from employees of public companies,” Kinnucan told Batts. “I then passed the information to clients.”
Assistant U.S. Attorney Katherine Goldstein said Kinnucan obtained inside information about SanDisk Corp (SNDK), F5 Networks Inc. (FFIV) and OmniVision Technologies Inc. (OVTI) , including quarterly revenue numbers, after “befriending” employees of technology companies.
He paid his sources in a variety of ways, prosecutors said, including paying for meals at high-end restaurants and shipping them expensive food, as well as giving them confidential information about other technology companies.
Goldstein told the judge that the government had evidence proving Kinnucan shared tips he had obtained from employees at public companies “through monetary and non-monetary benefits.”
“He passed that information to two portfolio managers here in New York City,” she said. “The two fund managers then traded on the information.”
The evidence against Kinnucan included cooperating witnesses, electronic messages and telephone records, as well as court-authorized wiretapped recordings, Goldstein said.
Goldstein didn’t identify the two fund managers in court yesterday. Kinnucan had dozens of hedge fund clients in the U.S.
Kinnucan told his hedge fund clients in October 2010 that he had refused a request to wear a wire for the FBI and inform on his clients, a move that presaged more than dozen insider- trading arrests in an initiative by Manhattan U.S. Attorney 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.”
Since August 2009, at least 70 people have been charged with insider trading by Bharara’s office with more than 60 convicted.
Prosecutors said that in the two months leading up to his arrest this February, he engaged in a “campaign” of threats and anti-Semitic rants.
“Too bad Hitler is not around, you should be in the gas chamber,” Kinnucan said in one message left on a federal prosecutor’s office phone in December.
Prosecutors said 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,” she ruled that he could be released on $5 million bond. Kinnucan was unable to meet the conditions she set.
Kinnucan may have faced as long as 45 years in prison. Under his plea agreement, he faces a sentencing range of 46 months to 57 months. Goldstein said the agreement includes a two-level enhancement as Kinnucan also admitted yesterday that he attempted to obstruct the probe.
“John Kinnucan engaged in an orchestrated campaign to obstruct a federal investigation into his illegal conduct, the very conduct for which he now stands convicted,” Bharara said in a statement. “Briefly a cause celebre as some called him, Mr. Kinnucan is now a felon facing sentencing for his insider trading crimes.”
Batts scheduled Kinnucan’s sentencing for Jan. 15.
Jennifer Brown, a public defender representing Kinnucan, said after court that her client was remorseful for his actions.
“With this plea of guilty, Mr. Kinnucan has accepted responsibility for his conduct,” Brown said. “It’s been a very difficult time for him because he is very far from his family. It is his hope that with this plea it is a first step to repairing the damage he has caused both to his family and to the public.”
Kinnucan also agreed yesterday to pay a fine of as much as $5 million and forfeit as much as $164,000.
“Mr. Kinnucan not only committed securities fraud, but he also engaged in threats and intimidation in an attempt to evade justice,” Janice K. Fedarcyk, head of the FBI’s New York office, said in a statement. She said Kinnucan’s “plea is vindication of the hard work of several agents from the FBI as Mr. Kinnucan now stands guilty of the exact charges he tried to repudiate.”
In court papers filed last year in the insider-trading case against Donald Longueuil, a former SAC Capital Advisors LP portfolio manager who pleaded guilty last year, prosecutors said the U.S. had listened in on wiretapped conversations that Kinnucan had with Longueuil on the analyst’s phone.
None of the charges against Kinnucan involved SAC Capital.
Longueuil said during his plea that while researching technology firms for two hedge funds, he conspired to obtain inside information on Marvell Technology Group Ltd. (MRVL) and that he conspired with Samir Barai, founder of Barai Capital Management LP. Barai pleaded guilty last year.
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 July 2011 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. (AAPL) and Cisco Systems Inc. (CSCO)
Barnetson and Shimoon weren’t named in the indictment of Kinnucan. Both have said they are cooperating in the probe of insider trading by fund managers, expert networking consultants and employees of publicly traded technology companies by the FBI in New York and Bharara’s office.
Prosecutors alleged Kinnucan tipped several of his 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.
The case is U.S. v. Kinnucan, 12-cv-163, U.S District Court, Southern District of New York (Manhattan).
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