A high-ranking executive of chipmaker Advanced Micro Devices (AMD) privately shared a lot of potentially market-moving information at crucial moments in the company's recent history, according to court documents.
The executive is former AMD CEO Hector Ruiz, according to a person familiar with the matter. As detailed in filings, Ruiz's disclosures offer an up-close glimpse of the information-sharing at the heart of a scandal that has rocked Galleon Management, a hedge fund controlled by billionaire trader Raj Rajaratnam.
In all, six people including Rajaratnam have been arrested on allegations they profited from trading on nonpublic information about such tech companies as Google (GOOG), Akamai (AKAM), Intel (INTC), Clearwire (CLWR), Polycom (PLCM) and Sun Microsystems (JAVA), now being bought by Oracle (ORCL). Rajaratnam and attorneys for the other accused have denied the allegations.
Ruiz has not been accused of wrongdoing, though a criminal complaint filed with the U.S. District Court for the Southern District of New York says he leaked information about an important corporate event before it was made public. He discussed the complex spin-off of Global Foundries, the chip manufacturing company AMD now co-owns with an investment firm controlled by the government of the Arab Emirate of Abu Dhabi. The Wall Street Journal initially identified Ruiz as the AMD official named in the complaint.
Feeding Info Months in Advance According to the complaint, Ruiz fed information to Danielle Chiesi, a suspect in the case, during the months of June through September 2008. The spin-off was announced publicly on Oct. 7 that year.
Ruiz, 63, now serves as chairman of Global Foundries and is no longer at AMD. A representative for Ruiz declined to comment, as did a spokesman for Global Foundries. AMD is "thoroughly reviewing the situation," the company said in a statement. "We are not aware of any allegation of criminal misconduct on the part of any current or former AMD employees, nor have any current or former AMD employees been charged with a crime."
Chiesi, 43, is a portfolio manager at New Castle, an investment firm based in White Plains, N.Y., that has ties to Galleon Management. The complaint by the U.S. Attorney's Office in New York accuses Chiesi; Mark Kurland, another New Castle executive; and Robert Moffat, then a senior vice-president at IBM (IBM) with insider trading. The trio conspired to gather confidential nonpublic information about companies and sought to coordinate findings with those of Rajaratnam, according to the complaint.
Rajaratnam is also accused by the Securities and Exchange Commission in a separate complaint of seeking insider information from Anil Kumar, a director at McKinsey and Co. who was advising AMD at the time. Rajaratnam and Kumar are among six people, including Chiesi, Kurland, and Moffat, charged by the SEC.
In the wake of the accusations, Galleon has wound down most of its $3.7 billion in funds. In a letter to employees and clients, Rajaratnam says the allegations leveled against him "are without exception, entirely baseless."
Lawyers for Chiesi, Kurland, Moffat, and Rajaratnam did not return requests for comment. Charles Clayman, a lawyer representing Kumar in the SEC case, says Kumar denies the charges against him.
On Oct. 19, IBM removed Moffat from its executive council and replaced him with Rodney Adkins, a senior vice-president in charge of development and manufacturing. Additionally Moffat has been placed on temporary leave, as a result of the charges. IBM declined to comment.
The Alleged Chain of Events According to the U.S. Attorney's Office complaint, Chiesi, Ruiz, and others had extensive conversations, captured by wiretaps, beginning in early June 2008. Around that time, AMD was struggling under the cost of manufacturing state-of-the-art computer chips that could keep pace with those by rival Intel. Speculation was rife throughout the summer that AMD was on the verge of a big reorganization that might involve investment from an outside entity. Ruiz ultimately stepped down as CEO to become its executive chairman on July 17, 2008. The conversations allegedly continued through September.
On June 6, 2008, Chiesi called Galleon's Rajaratnam, saying she had just spoken to an AMD executive, now said to be Ruiz, who told her that a deal relating to AMD's reorganization was "not close." Minutes later, Rajaratnam called Chiesi back, advising her to sell AMD stock in a so-called short sale, whereby investors try to profit from betting against a security, and then reverse the trade "before the deal," the complaint says. In theory, that series of trades would have helped an investor profit from a decline in the stock and then benefit from any rally that followed the announcement of a reorganization.
Later, on Aug. 15, Rajaratnam called Chiesi to check in on AMD. Chiesi relayed conflicting information on the timing of the reorganization. She said she had learned from IBM, which shares certain chipmaking technologies with AMD, that the deal would be done on Sept. 9, but information from Ruiz pointed to a "mid-September" time frame. Rajaratnam asked Chiesi if she thought the AMD executive would "give her the full lowdown." Chiesi's reply: "Oh, yeah. Plus IBM, too." According to the complaint, Chiesi believed AMD's reorganization couldn't happen without IBM's blessing.
On Aug. 19, Chiesi was recorded telling Rajaratnam that she had just spoken to the AMD executive, and quoted him as saying that "Wall Street will be shocked," by the deal, the complaint says.
During the conversation, Rajaratnam and Chiesi discussed the importance of keeping the information confidential. "If it leaks, I think I'm out of business," Chiesi says. "Because … Who knows IBM. And who, who's in bed with AMD? Put Danielle's name on the [expletive] ticket."
In a different phone call, this one with Kurland of New Castle, Chiesi cites concerns about the security of her cell phone and says she's going to call the AMD executive from a new number. "I'm paranoid," she says.
By late August, Chiesi comes back to Ruiz with a series of detailed questions, at Kurland's suggestion, according to the complaint. In a conversation on Aug. 26, she asks how much debt would be left at AMD after the spin-off and whether the deal would be announced before government approval. Ruiz tells her that most of AMD's debt would be transferred to the new company and that the announcement would come before government's green light. Finally, she asked whether the deal would be announced in September. Ruiz's answer: "Yes."
The next day, Chiesi called an unnamed person not charged in the matter, saying she would be buying shares of AMD. Later that day, the complaint says, Rajaratnam called Chiesi, worrying they might attract the attention of regulators if AMD's stock price increased by more than 30% after her buying. "I think you should buy and sell, buy and sell," he tells her.
The complaint's narrative then moves to Sept. 16, 2008, when Ruiz—still described only as "the AMD Executive"—called Chiesi and is quoted as saying, "You know we are going to shock the hell out of everybody." Chiesi again asked about the timing of the announcement. There's a "99 percent" chance it would happen in October, but before quarterly earnings were to be reported on Oct. 16. AMD's reorganization was ultimately announced on Oct. 7, 2008.
Little, If Any, Gain In the end, New Castle may not have profited much from the nonpublic information. From when New Castle started accumulating AMD stock on Aug. 15 until the day before the reorganization announcement, AMD dropped almost 28%, to 4.23. By the time New Castle sold AMD stock on Oct. 20, the shares were still worth less than their purchase value of 4.25.
AMD shares were being dragged down by the financial crisis that accelerated in September. Wall Street, it turns out, was facing a bigger shock than AMD's reorganization.