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Chiesi Sentenced to 2 1/2 Years Prison in Galleon Insider Case

Danielle Chiesi
Danielle Chiesi, a New Castle Funds LLC consultant, center, exits federal court with attorney Alan Kaufman in New York, on Wednesday, Feb. 17, 2010. Photographer: Jin Lee/Bloomberg

Danielle Chiesi, the former New Castle Funds LLC analyst who pleaded guilty to passing secret tips to Galleon Group LLC co-founder Raj Rajaratnam, was sentenced to 2 1/2 years in prison.

U.S. District Court Judge Richard Holwell in Manhattan yesterday called her crimes “deplorable” as he imposed the sentence, plus two years of supervised release, on the 45-year-old former beauty queen. “This was not an isolated transgression,” he said.

“The message to Wall Street needs to be loud and clear. If you trade on inside information, you will be caught,” Holwell said. “And if convicted, you will be sentenced to a substantial term in prison.”

Chiesi, who wore a light pink sleeveless sheath dress and pearl necklace, must report Sept. 20 to Federal Prison Camp Alderson in West Virginia, a minimum-security facility in the foothills of the Allegheny Mountains where Martha Stewart served a five-month term after being convicted of lying to federal authorities about her sale of stocks.

‘Won’t Happen Again’

“I know that there’s a punishment for people who do wrong,” Chiesi told the judge, dropping her head and her voice choking with emotion. “But it won’t happen again.”

Holwell yesterday also imposed a $25,000 fine and ordered her to do 250 hours of community service. He directed that she undergo substance-abuse treatment and therapy “to allow her to readjust a moral compass which obviously fell by the wayside.”

Chiesi pleaded guilty Jan. 19 to three counts of conspiracy, telling Holwell at the time that she was “deeply ashamed” of what she had done.

Chiesi’s lawyer, Alan Kaufman, yesterday asked the judge for less prison time than the 27 months Holwell imposed last year on her former boss, Mark Kurland, co-founder of New Castle Funds, arguing that she was emotionally and financially dependent on Kurland. Chiesi’s lawyers claimed in court papers that Kurland had used their “toxic” sexual relationship to manipulate her into feeding him inside tips.

Assistant U.S. Attorneys Reed Brodsky, Jonathan Streeter and Andrew Michaelson had argued that Chiesi should get a term of 37 to 46 months in prison, citing the U.S. sentencing guidelines, which aren’t binding.

‘Market Moving Crime’

In court yesterday, Michaelson disputed any depiction of Chiesi as a victim of more powerful men. “She forced her relationships, she committed the criminal conduct and she shared that information with others,” he said. “Chiesi played a central, starring role in her crimes.”

Michaelson said Chiesi “seriously corrupted the markets” because she shared information with powerful fund managers like Rajaratnam who controlled billions of dollars in assets and acted on her tips. He cited an insider trading tip she shared in one wiretapped August 2008 conversation with Rajaratnam involving Advanced Micro Devices Inc.

After she illegally passed the information to Rajaratnam, 7 million shares of AMD were traded by recipients of her tips, which accounted for 20 percent of the company’s stock traded that day, Michaelson said.

“This is what makes Ms. Chiesi’s crime so significant,” Michaelson said. “She committed, literally, the market-moving crime.”

‘Should Have Learned’

Chiesi left the courtroom accompanied by her family and lawyers. When a court officer instructed reporters not to break court rules and attempt to interview her in the building, Chiesi quipped to her supporters, “I should have learned the rules before I got wiretapped.”

Before leaving, she also stopped to shake hands with prosecutors and Diane Wehner, the FBI agent who initially arrested her in October 2009. Asked later what she said to them, Chiesi smiled and said, “I told the FBI if they’re ever going to knock on my door, do it in the afternoon,” referring to her pre-dawn arrest.

Asked by reporters if she was prepared to serve her sentence, Chiesi said, “Absolutely,” she said, “I anticipate to survive.”

Kaufman said, “We think the judge gave what he thought was a fair sentence and we respect the thoughtfulness and thoroughness he paid. Danielle will serve her sentence and get on with her life.”

Rajaratnam Convicted

Chiesi and Kurland both pleaded guilty in connection with a government investigation of hedge-fund insider trading centered on Rajaratnam, 54, in the largest crackdown on hedge-fund insider trading in U.S. history.

Rajaratnam was convicted May 11 on five counts of conspiracy and nine counts of securities fraud after an eight-week trial. The Sri Lankan-born money manager was accused of making $45 million from tips by corporate insiders. He is scheduled to be sentenced Sept. 27.

More than two dozen people have been convicted by Manhattan U.S. Attorney Preet Bharara’s office with four of them found guilty at trial in the Galleon probe.

During Rajaratnam’s trial, jurors heard wiretaps of conversations which they said showed insider trading as it occurred.

‘Finely Tuned Piano’

In a July 24, 2008, telephone conversation played during Rajaratnam’s trial, Chiesi told Rajaratnam that she “played” a friend “like a finely tuned piano” after getting a tip that Akamai Technologies Inc. would cut its forecast.

“Honey, you know what, it’s just for us,” Chiesi continued, according to the tape. “We go slow, keep shorting every day.”

On one wiretap, Chiesi was heard worrying that she might get convicted of a crime.

“I’ll be like Martha F---ing Stewart,” she says.

Chiesi didn’t testify at Rajaratnam’s trial.

Prosecutors say Chiesi was tipped by Kieran Taylor, then an Akamai executive, who hasn’t been charged with wrongdoing. In a short sale, an investor sells borrowed shares, hoping to replace them later with cheaper shares while profiting from the difference.

Akamai announced its lower forecast on July 30, 2008. At 5:30 p.m. that day, Rajaratnam called Chiesi to say “thank you,” according to another tape played at Rajaratnam’s trial in which Rajaratnam says he sold at least 150,000 Akamai shares short. The stock, which closed at $31.25 on July 30, opened the next day at $23.34.

“You did it in such a classy way,” Rajaratnam said in the taped call. “The way you worked the relationship.”

“It’s a conquest,” an excited Chiesi replied, according to the tape. “It’s a conquest. It’s mentally fabulous for me.”

Kurland’s Release

Kurland is scheduled to be released in July 2012, the U.S. Bureau of Prisons website shows. Former ex-Atheros Communications Inc. Vice President Ali Hariri, who was convicted in the Galleon case, was sentenced to serve 18 months in prison and is scheduled to be released in May 2012, according to the Bureau of Prisons website.

Prosecutors said that Chiesi received inside information from sources including Hector Ruiz, the former chairman of AMD, and Robert Moffat, a former International Business Machines Corp. executive. She passed the tips to Kurland and to portfolio managers including Rajaratnam, Steven Fortuna, Richard Choo-Beng Lee and Ali Far.

Ruiz hasn’t been charged criminally. Moffat, Fortuna, Lee and Far have all pleaded guilty. Lee and Far, who are cooperating with the U.S., haven’t been sentenced.

‘Intimate Relationship’

Moffat, who said he had an “intimate relationship” with Chiesi, was sentenced to six months in prison and was released in May, the Bureau of Prisons website shows. In his own sentencing memorandum, Moffat claimed she “played him” to obtain inside information.

In papers filed before sentencing, Chiesi’s lawyers said she has had difficulty coping with the loss of her relationship with Kurland and her job and with anxiety over the criminal charges, they said. Chiesi’s psychiatrist diagnosed her with borderline personality disorder, according to the filing.

Patrick Smith and Theodore Altman, lawyers who represent Kurland, didn’t immediately return voice-mail messages seeking comment.

“Dani was motivated by an unhealthy and abnormal desire to please,” her lawyers told the judge in a court filing. “The primary focus of this was Mark Kurland, but it also affected her interactions with other people in the hedge fund world and with executives at public companies.”

“Chiesi operated largely on her own, and she was sufficiently experienced and sophisticated that she knew precisely what she was doing,” the government argued in its sentencing memorandum. “In short, she was not merely Kurland’s minion.”

The case is U.S. v. Rajaratnam, 09-cr-1184, U.S. District Court, Southern District of New York (Manhattan).

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