John Kinnucan, founder of Broadband Research LLC, was indicted for passing tips to clients at two unidentified hedge funds about SanDisk Corp, F5 Networks Inc., OmniVision Technologies Inc. and other companies.
Kinnucan, 54, was charged in today’s indictment with two counts of conspiracy and two counts of securities fraud in a scheme to obtain nonpublic information about technology companies for his clients that operated from 2008 to 2010.
Kinnucan “befriended” employees of public technology companies, obtained nonpublic information from them and passed them to his fund manager clients, the U.S. said.
He paid his sources in a variety of ways, prosecutors said, “including paying for their meals at high-end restaurants and shipping them expensive food, providing them with confidential information about other technology companies and industry trends and providing them stock trading advice and tips,” said prosecutors in the office of Manhattan U.S. Attorney Preet Bharara.
To further the scheme, Kinnucan made numerous representations to Broadband clients, telling them that none of the information he obtained came from insiders at public companies, that he didn’t pay any of his sources and that his tips had been been reviewed and approved by a compliance attorney in San Francisco, according to the indictment.
The unidentified insiders who conspired with Kinnucan included employees at Flextronics International Ltd., 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 federal court in July 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. and Cisco Systems Inc.
While neither man was named in the indictment of Kinnucan, both men are cooperating with the probe of insider trading by fund managers, expert networking consultants and employees of publicly-traded technology companies by the Federal Bureau of Investigation in New York and Bharara’s office.
Prosecutors alleged that after Kinnucan obtained information from an F5 insider that the company was going to beat analysts’ estimates in July 2010, he then passed tips to several of his Broadband clients. At least two of Kinnucan’s clients executed trades in F5 stock, either earning profits or avoiding losses totaling more than $1.5 million, prosecutors said.
Kinnucan announced in October 2010 that he’d refused a request by FBI agents in New York to wear a wire and inform on his fund manager clients, a move that presaged more than dozen insider-trading arrests made during the federal initiative, known as “Perfect Hedge.”
“Am I a target? Yeah, absolutely,” Kinnucan said in a July 8 interview, adding that he expected to be arrested. “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.
He has been held in U.S. custody since he was arrested Feb. 16 at his home in Portland, Oregon. U.S. Magistrate Judge John Acosta in Oregon directed that Kinnucan be held until a detention hearing resumes tomorrow after prosecutors in New York said he posed a danger to the community.
Thomas Hester, a public defender in Oregon who was appointed to represent Kinnucan, didn’t return a voice-mail message left at his office seeking comment about the case.
The case is U.S. v. Kinnucan, 12-cv-163, U.S District Court, Southern District of New York (Manhattan).