Ex-SanDisk Corp. executive Donald Barnetson pleaded guilty to passing nonpublic information to hedge fund consultant John Kinnucan in the U.S.’s five-year crackdown on insider trading by fund managers, expert-networking consultants and employees of publicly-traded companies.
Barnetson revealed his own role in the conspiracy yesterday at a plea hearing in Manhattan federal court. In Portland, Oregon, Kinnucan, an analyst who gained national attention for refusing to cooperate with the FBI, was ordered held without bail on charges he passed and received illegal tips. The U.S. said he engaged in a “pattern of threats and intimidation” and left anti-Semitic messages for prosecutors and FBI agents. U.S. Magistrate Judge John Acosta set the next hearing for Feb. 22.
The probe by the Federal Bureau of Investigation in New York and the Manhattan U.S. Attorney’s Office, called operation “Perfect Hedge,” has resulted in charges against at least 64 people. Since 2009, more than 50 individuals have either pleaded guilty or been convicted at trial, including Galleon Group LLC co-founder Raj Rajaratnam, who is serving an 11-year prison term.
In October, the U.S. charged Rajat Gupta, a former Goldman Sachs Group Inc. and Procter & Gamble Co. director. The government said he leaked nonpublic information to Rajaratnam. Gupta, who has denied wrongdoing, is scheduled for trial in May.
The U.S. initiative expanded earlier this week to focus on banks and activities in Taiwan, with an investigation of Henry King, a Goldman Sachs analyst covering Taiwanese technology companies, a person familiar with the matter said.
Barnetson, 37, formerly a senior director of outbound marketing at Milpitas, California-based SanDisk, the biggest maker of flash-memory cards, said he passed illegal tips. Kinnucan shared them with clients, according to the plea agreement, including hedge funds and money managers.
Barnetson, who is cooperating with the government, pleaded guilty to one count of conspiracy to commit securities and wire fraud. He faces as long as five years in prison and was ordered released on $50,000 bond.
“I conspired with a consultant to provide confidential information with regard to my employer at the time, SanDisk Corp.,” Barnetson told U.S. Magistrate Judge Gabriel Gorenstein at the hearing.
Prosecutors claim Barnetson tipped Kinnucan in July 2010 about SanDisk’s anticipated revenue, which wasn’t public. In September 2010, he told Kinnucan about confidential negotiations about a legal dispute between SanDisk and Apple Inc., according to the complaint.
Kinnucan paid Barnetson with a $25,000 investment in a business he was starting, as well as meals at expensive restaurants and food deliveries, according to the criminal complaint against Kinnucan. The consultant also gave Barnetson inside information about other companies, according to prosecutors.
Kinnucan, 54, the founder of Broadband Research LLC, was arrested at his Portland home Feb. 16. He was charged in the criminal complaint unsealed in New York federal court with one count of conspiracy to commit securities fraud, one count of conspiracy to commit wire fraud and two counts of securities fraud.
Yesterday, Carlson Capital LP, a $4.4 billion hedge-fund firm based in Dallas, said that one of its former portfolio managers had received inside information from Kinnucan.
“The individual referenced was at the firm for nine months and left in March 2011,” Carlson said in a statement without identifying the person. “Carlson has cooperated fully with the government and has been informed that it is not a target of the investigation. The former employee was the only member of the firm to use this consultant.”
Kinnucan used “financial incentives, fancy meals and other inducements to curry favor with public company insiders so they’d serve up their employer’s secrets,” Manhattan U.S. Attorney Preet Bharara, whose office is prosecuting the case, said in a statement.
Kinnucan allegedly paid one source of illegal tips $27,500. He also provided inside information to his clients on the understanding they would use the tips to execute transactions, Assistant U.S. Attorneys Avi Weitzman and Katherine Goldstein said in the complaint.
From 2008 to 2010, Kinnucan obtained nonpublic information such as quarterly revenue numbers from co-conspirators who worked at publicly traded companies such as F5 Networks Inc., SanDisk and Flextronics International Ltd., according to prosecutors.
In June and July of 2010, he sought information about F5’s financial results for the quarter ended June 30, 2010, from an F5 employee, the U.S. said.
Kinnucan obtained information about F5's quarterly results from an F5 employee in a July 2, 2010, telephone call, prosecutors said. While Kinnucan said revenue guidance the company had previously provided was $220 million, the F5 employee told Kinnucan the unadjusted revenue number was actually “$232 million,” confirming the company would beat Wall Street’s consensus, the U.S. said.
Within minutes of the conversation, Kinnucan called numerous Broadband clients to provide them with the inside information and at least two executed trades based in whole or in part on the information Kinnucan provided, earning profits or avoiding losses of more than $1.5 million, according to the government.
To attract and retain clients and to hide the true identity of his sources, Kinnucan lied to Broadband Research clients about the sources of inside information by claiming falsely that none of them were employed at publicly traded companies and that he didn’t pay them for information, the U.S. said.
“Kinnucan’s company, Broadband Research, was a misnomer,” Janice Fedarcyk, head of the FBI’s New York office, said in a statement. “As the complaint alleges, the information he obtained and passed along to clients was not the result of research. It was inside information Kinnucan bought from company insiders. That kind of information beats research every time. The only problem is it isn’t legal.”
The U.S. Securities and Exchange Commission filed a parallel lawsuit against Kinnucan yesterday in federal court in Manhattan. The agency claims that he got tips in 2009 and 2010 from insiders at publicly traded technology companies and shared the information with several unnamed fund managers.
The SEC said Kinnucan generated hundreds of thousands of dollars in annual revenue for Broadband Research from a series of “well-placed employees” at public companies.
“Obtaining important unreported financial results from company insiders and selling that information to hedge funds is not legitimate expert networking services, it’s old fashioned insider trading,” said Robert Khuzami, the SEC’s director of enforcement.
Kinnucan whose public refusal of an FBI request to wear a wire presaged a dozen insider-trading arrests, said in a July 8 interview that he expected to be arrested.
“Am I a target? Yeah, absolutely,” Kinnucan said in the interview. “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.
In October 2010, he sent an e-mail saying he had been approached by federal agents who asked him to record conversations with an unidentified money manager. The message was sent to about 50 recipients, including clients such as Wellington Management Co. in Boston, Janus Capital Group Inc. in Denver and SAC Capital Advisors LP in Stamford, Connecticut. None of those firms has been accused of wrongdoing.
Federal prosecutors in New York last year disclosed in court papers that they had a court-authorized wiretap on Kinnucan’s mobile phone. His calls were recorded in talks with Donald Longueuil, a former SAC portfolio manager, and Level Global Investors LP co-founder Anthony Chiasson, prosecutors said.
At yesterday’s hearing, prosecutors said Kinnucan should be held without bail. The U.S. cited numerous calls as well as ethnic and racial slurs and references to Adolf Hitler and the Holocaust.
“Kinnucan has engaged in volatile and extreme conduct, using references to genocide, violence and physical harm directed to the targets of his ominous tirades,” Assistant U.S. Attorney Chris LaVigne in New York said in papers filed in federal court in Portland.
On Dec. 6, prosecutors said, Kinnucan left a voice-mail message for an unidentified prosecutor saying “Remember me? The guy who you tried to destroy,” followed by a series of expletives, the government said. Kinnucan added, according to prosecutors, “Ah, too bad Hitler’s not around. He’d know what to do with scum like you.”
The calls “are the actions of a volatile and hostile individual” prosecutors argued. He also allegedly threatened cooperating witnesses, the government said.
Longueuil was sentenced in July to 2 1/2 years in prison for his role in an insider-trading scheme. Chiasson pleaded not guilty Feb. 14 to conspiracy and securities-fraud charges in federal court in Manhattan.
Assistant U.S. Attorney Antonia Apps said at the Feb. 14 hearing that prosecutors had recordings of conversations between Chiasson and Kinnucan.
Chiasson was one of four men arrested last month and charged with participating in a “criminal club” that made almost $62 million using illegal tips to trade in Dell Inc. stock. Prosecutors said the ring, which allegedly involved five hedge funds and investment firms, is the largest identified by the U.S. to date tied to a single stock.
Expert-networking firms such as Broadband connect investors with industry experts who provide insight into a specific market.
Walter Shimoon, a former Flextronics International Ltd. executive charged with insider trading who pleaded guilty in July, said in court that he gave Kinnucan confidential nonpublic information about his own company, as well as about OmniVision Technologies Inc., Apple and Cisco Systems Inc.
Kinnucan said in July that he didn’t know why the government would focus on him, saying his research was “entirely in line” with standard industry practices. “This was industry gossip,” he said of his work.
‘Find Every Day’
“The stuff we talked about you can find every day, publicly, on the Internet,” he said.
During his plea before U.S. District Judge Jed Rakoff, Shimoon said he provided “specific production schedules and forecasts for Flextronics customers and about its suppliers like OmniVision, which produced camera sensors.”
Shimoon said that, at the time, he was working as a paid consultant for Broadband Research, which Kinnucan opened in 1999, as well as for Mountain View, California-based Primary Global Research LLC, another expert-networking firm.
Shimoon said Primary Global paid him about $200 an hour and that he had earned a total of $18,000 from the company for passing secret tips to hedge fund managers. Shimoon said he got more than $27,000 from Kinnucan’s firm.
The crime was committed “in connection with Shimoon providing material, nonpublic information to John Kinnucan, Broadband Research, and, indirectly, to Broadband Research’s clients, including money managers,” the government said in court papers in Shimoon’s case.
The criminal case is U.S. v. Kinnucan, 12-MAG-424, and the civil case is SEC v. Kinnucan, 12-CV-1230, Southern District of New York (Manhattan).