New Insider-Trading Arrests Point Toward Hedge Funds

New Insider-Trading Arrests Point Toward Hedge Funds
James Fleishman, an account representative with Primary Global Research LLC, exits federal court in San Jose, California. Photographer: Tony Avelar/Bloomberg

The arrests of three technology company workers who allegedly sold secrets about Apple Inc., Dell Inc. and Advanced Micro Devices Inc. signal the U.S. may be closing in on the hedge funds that paid for their expertise.

The men, who worked at AMD, Flextronics International Ltd. and Taiwan Semiconductor Manufacturing Co., were arrested yesterday on securities fraud and conspiracy charges for a scheme that Manhattan U.S. Attorney Preet Bharara said operated from 2008 to early 2010.

Also arrested was James Fleishman, a sales manager at Primary Global Research LLC, the expert-networking firm where the three worked as consultants. If convicted, all four face as long as 20 years in prison.

“Prosecutors will want to pursue the hedge funds that hired the expert consultants to give them insider information,” said Stephen Miller, a lawyer at Cozen O’Connor LLP and a former federal prosecutor in New York and Philadelphia.

A fifth man, Daniel DeVore, 46, formerly a supply manager at Dell, pleaded guilty to conspiracy to commit securities fraud and wire fraud in federal court in New York on Dec. 10, the U.S. said yesterday. DeVore said he worked as a paid consultant for Primary Global from late 2007 to August 2010 and, through the firm, accepted money from hedge funds for inside information.

Expert-networking companies such as Mountain View, California-based Primary Global match investors with specialists who provide insight into specific markets. The criminal complaint unsealed yesterday describes the links among Primary Global, the technology experts it employed and unidentified hedge funds willing to pay for inside information.

Search Warrants

On Nov. 22, Federal Bureau of Investigation agents from New York and Boston executed search warrants at the offices of Level Global Investors LP and Diamondback Capital Management LLC, hedge funds founded by alumni of SAC Capital Advisors. Agents that day also executed a search warrant at the offices of Loch Capital Management. None of the firms or their employees has been accused of any wrongdoing.

At his Dec. 10 plea hearing, DeVore said he worked for Primary Global as an intermediary and “provided information to money managers” knowing they would use it to trade securities. He told the judge he gave the inside information to clients of Primary Global and Guidepoint Global LLC, a research firm.

Guidepoint was subpoenaed by Massachusetts Secretary of the Commonwealth William F. Galvin in November in connection with its relationship to a hedge fund in the state.

‘Corrupt Network’

“A corrupt network of insiders at some of the world’s leading technology companies served as so-called consultants who sold out their employers by stealing and then peddling their valuable inside information,” Bharara said in a statement yesterday.

The four men charged yesterday are the latest in a series of arrests since the Nov. 24 arrest of another Primary Global employee, Don Chu, charged with arranging for insiders at publicly traded companies to improperly provide material information to hedge fund clients of the consulting firm where he worked.

“This wasn’t market research,” said Janice Fedarcyk, assistant director-in-charge of the FBI’s New York Office. “What the defendants did was purchase and sell inside information.”

Phone Taps

Investigators made consensual and wiretap recordings of an unidentified expert-networking firm’s phones, the land lines of an unidentified hedge fund and the mobile phones of two of the men arrested yesterday -- Mark Anthony Longoria, who worked at chipmaker AMD, and Walter Shimoon, formerly of Flextronics, a Singapore-based maker of electronic components -- the U.S. said. At least two hedge funds are described in the complaint. Neither is identified by name.

“Few hedge fund managers have the investment skill to deliver the benefits that they promise,” James Fanto, a professor at Brooklyn Law School in New York, said in an e-mail. “They have to find an edge however they can -- in this case through the expert networks,” said Fanto, who teaches banking, corporate and securities law.

The case is the latest by Bharara’s office alleging wrongdoing involving hedge funds based on wiretap evidence. He announced charges against Raj Rajaratnam, 53, the co-founder of Galleon Group LLC, in October 2009, calling it the largest insider-trading case involving hedge funds.

The FBI recorded thousands of conversations during their investigation of that case, lawyers said at an October hearing in Rajaratnam’s case. Rajaratnam, who denies the charges, is scheduled to go on trial next year.

Hedge-Fund Phone

In the latest case, the FBI listened in on two telephones used by Primary Global from 2009 to 2010 and the landline of a California-based hedge fund from October 2008 to February 2009, the complaint says.

According to the complaint, the U.S. also made consensual recordings using five cooperating witnesses, had a tap on mobile phones used by Shimoon and Longoria, and recorded conversations at Primary Global in November 2009, a month after Rajaratnam’s arrest.

“If you think you shouldn’t be talking about it --don’t,” an unidentified Primary Global employee tells Shimoon during one call, according to the complaint.

“That would really suck if you recorded all the calls,” Shimoon replies.

This kind of talk can help the government’s case, said Miller, the former federal prosecutor.

‘Gets His Wings’

“A prosecutor angel gets his wings every time someone says ‘Boy, it would really stink if they were taping our calls,’” he said.

Fleishman, 41, of Santa Clara, California, was charged with wire fraud and conspiracy for allegedly trying to give non-public information to clients, including hedge funds, according to the complaint. Longoria, 44, of Round Rock, Texas; Shimoon, 39, of San Diego; and Manosha Karunatilaka, 37, of Marlborough, Massachusetts, who worked at chipmaker Taiwan Semiconductor, were charged with wire fraud, conspiracy to commit securities fraud and conspiracy to commit wire fraud.

Fleishman appeared in federal court in San Jose, California, yesterday and was released on $700,000 bail. Longoria was granted $50,000 bail and freed by a federal magistrate in Austin, Texas. Karunatilaka got bail of $300,000 in Boston federal court, his lawyer, Brad Bailey, said.

Shimoon Fired

Shimoon made his first court appearance today in San Diego, where a judge refused to grant him immediate bail after a prosecutor said there’s a “serious” risk he’ll flee if released. A bail hearing is scheduled for Dec. 20.

Flextronics said Shimoon has been fired.

“PGR clients were money managers, including hedge funds, many of whom were located in Manhattan,” DeVore told U.S. District Judge Jed Rakoff at his plea hearing, according to a court transcript.

“I provided to PGR clients and to PGR employees material non-public information, Dell confidential information, Dell’s production numbers, pricing inventory and market share of Dell’s hard drives suppliers,” he said. “I also knew that on several occasions I was speaking with hedge fund managers and employees located in New York.”

David Frink, a spokesman for Round Rock-based Dell, the world’s third-biggest maker of personal computers, said the company will cooperate with law enforcement. DeVore’s lawyer, Johnny Sutton, declined to comment.

Longoria, Karunatilaka and Shimoon had worked as consultants at Primary Global, Dan Charnas, a company spokesman, said in an e-mailed statement. Fleishman has been placed on leave, Charnas said. He had no further comment.

‘Expressly Prohibited’

Longoria resigned from AMD in October, said Mike Silverman, a spokesman for the Sunnyvale, California-based chipmaker.

“This kind of activity is expressly prohibited by the company,” Silverman said.

Longoria is cooperating with the investigation, Sam Bassett, his lawyer, said in an interview yesterday.

Flextronics supplied components to Apple during the time of the alleged fraud, prosecutors said in the statement. Shimoon is accused of providing Fleishman’s firm with confidential sales forecast information and new product features for the iPhone.

Steve Dowling, a spokesman for Cupertino, California-based Apple, declined to comment.

Taiwan Semiconductor said in an e-mail it terminated Karunatilaka’s employment on the day of his indictment and that the chipmaker will cooperate with U.S. prosecutors.

Five Helpers

The new complaint indicates five people have been working with the government in the insider-trading probe. Only one witness was identified by name: Richard Choo-Beng Lee, 56, a former partner at San Jose, California-based hedge fund Spherix Capital LLC. He began cooperating with the U.S. in April 2009, court records show, providing information to Bharara’s office in the government’s case against Galleon. He pleaded guilty in November 2009.

His partner at San Jose, California-based Spherix, Ali Far, who also worked as an analyst and portfolio manager at Galleon, also pleaded guilty and is aiding the U.S. in the Galleon probe.

The U.S. said Chu established a relationship with Lee and that Spherix paid Chu’s firm for tips concerning Atheros Communications Inc., Broadcom Corp. and Sierra Wireless Inc., according to the government’s complaint.

The complaint unsealed yesterday lists four cooperators without naming them: a Dell manager, a Primary Global analyst, a New York hedge-fund analyst and a witness “who had substantial experience evaluating public companies in the semiconductor and technology industries.”

Shorter Sentence

With the exception of the hedge-fund analyst, who hasn’t been charged with any crimes, the witnesses have agreed to plead guilty and are cooperating in the hope of receiving a reduced sentence, prosecutors said.

In July 2009, Lee recorded conversations in which Longoria gave him inside information about AMD, the U.S. said in its complaint. The new complaint also identifies Chu as having worked at Fleishman’s firm as a liaison “to consultants and other sources of information in Asia.”

In January, former McKinsey & Co. director Anil Kumar pleaded guilty to criminal charges, saying that he leaked advance information to Rajaratnam about AMD’s acquisition of ATI Technologies Inc. in 2006, which Rajaratnam used to make $19 million for Galleon.

Bharara thanked Apple, Flextronics, AMD, Taiwan Semiconductor and Dell for their assistance in the U.S. probe. The investigation is continuing, he said.

“You have to imagine it will go in the direction of the funds,” said Miller, the former federal prosecutor.

The case is U.S. v. Shimoon, 10-mj-2823, U.S. District Court, Southern District of New York (Manhattan).

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