Jan. 16 (Bloomberg) -- John Kinnucan, the expert-networker who refused to cooperate in a U.S. probe of insider trading before admitting to passing tips to hedge-fund clients, was sentenced to four years and three months in prison.
U.S. District Judge Deborah Batts in Manhattan yesterday rejected arguments by Kinnucan’s lawyers that his actions stemmed from alcohol abuse triggered by the stress of being the target of a federal crackdown on insider trading. Defense lawyer Jennifer Brown also said Kinnucan, the founder of Broadband Research LLC, suffered from an addiction to gambling in the stock market.
“It appears his sense of entitlement and anger are equally if not more to blame than gambling or alcohol addiction,” the judge said. “Insider trading is a serious crime and obstruction of justice by threatening personally the government authorities who are doing their jobs by investigating and prosecuting insider trading cannot be tolerated.”
Kinnucan, has been in custody since he was arrested at his Portland, Oregon, home by agents with the FBI on Feb. 16. He pleaded guilty in July to one count of conspiracy and two counts of securities fraud. His lawyers sought a two-year prison term, while prosecutors asked for 57 months, the maximum allowed by law, rather than a range of time under U.S. sentencing guidelines.
Kinnucan spoke briefly before his sentence was imposed,
“I just like to say I’m sorry to everyone for the trouble my actions caused; it wasn’t my intention,” he said. “I’m deeply sorry.”
He emerged as a figure in the insider-trading probe when he sent an e-mail to his hedge fund clients in October 2010, announcing he had refused a request to wear a wire for the FBI and inform on them for the U.S.
“Today, two fresh-faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information,” Kinnucan said in the e-mail.
He continued, “We obviously beg to differ, so have therefore declined the young gentlemen’s gracious offer to wear a wire and therefore ensnare you in their devious web.”
The offer to Kinnucan presaged dozens of arrests as part of law enforcement initiatives by Manhattan U.S. Attorney Preet Bharara’s office and the Federal Bureau of Investigation in New York against insider trading at hedge funds.
In the months leading up to his arrest, Kinnucan obstructed justice by engaging in a “campaign” of threats against prosecutors and agents, the U.S. said. During a hearing last year, prosecutors played profanity-filled voice-mails he left with assistant U.S. attorneys, FBI agents and a witness who is cooperating with the government’s investigation. The voice-mails contain numerous ethnic and racial slurs and references to the Holocaust.
“Too bad Hitler is not around, you should be in the gas chamber,” Kinnucan said in one message on a federal prosecutor’s office phone in December 2011.
While a defense sentencing memo to the judge wasn’t filed publicly, prosecutors quoted from it in court papers, saying Kinnucan’s lawyers said he had been under the influence of alcohol when he made the calls.
Prosecutors also quoted from a psychological report by U.S. Probation officials submitted by the defense in which Kinnucan contends the voice-mail messages he left didn’t reflect his true beliefs, saying the defendant said during the interview, “My best friend is Jewish.”
In court yesterday, Brown called the case a “cautionary tale” for someone who challenges the government and said her client’s actions had “riled up” the government. She said Kinnucan lost 35 pounds, his business failed and his wife, Catherine, filed for divorce.
“It was not a carefully orchestrated campaign,” Brown told the judge. She said Kinnucan had been drinking heavily before his arrest and that his mother and two brothers had died, putting him under emotional stress.
“These are the rants of someone who, for a time, became unhinged,” Brown said. “He lashed out at the world and blamed everyone for things of his own making.”
Batts said Kinnucan aggressively targeted those in the government he blamed for his woes.
“He lashed out in anger when approached by government employees and made a spectacle of himself in the press,” Batts said. “He harangued and threatened government witnesses, agents and prosecutors with obscene, hateful, despicable and repetitive rantings.”
Brown declined to comment after court yesterday.
Kinnucan pleaded guilty to obtaining and passing illegal tips to clients of his expert-networking firm, including two in New York. Prosecutors said he got inside information about SanDisk Corp., F5 Networks Inc. and OmniVision Technologies Inc., including quarterly revenue numbers, after befriending employees of technology companies.
He paid his sources in a variety of ways, prosecutors said, including by buying them meals at high-end restaurants and shipping them expensive food, as well as giving them confidential information about other technology companies.
“Today’s sentence of John Kinnucan is a fitting conclusion to a criminal odyssey that began with the buying and selling of inside information and evolved into a vile and very public campaign to threaten public servants and obstruct the federal investigation into Kinnucan’s conduct,” Bharara said in a statement yesterday. “Mr. Kinnucan will now pay for both crimes with his liberty.”
Kinnucan was ordered by Batts to forfeit $164,000 he made in illegal profit earned from his clients for the insider tips.
In late 2010, Kinnucan appeared on CNBC and wrote a Nov. 29, 2010, essay for the New York Times’ Dealbook in which he called the visit by FBI agents to his home “a shocking, terrifying experience.” He also argued the government was attempting to “retroactively criminalize” industry practices.
In a July 2011 Bloomberg News interview, Kinnucan said his research was based on “publicly available information.”
“The stuff we talked about you can find every day, publicly, on the Internet,” he said, citing numerous examples of the kind of data he called “channel checks” and provided to clients.
Batts said she would recommend to U.S. Bureau of Prisons officials that Kinnucan serve his term at FCI Sheridan, a medium-security facility located in Northwest Oregon.
As part of his sentence, Batts directed that Kinnucan enter an anger-management program while in prison, receive periodic testing for substance abuse, including alcohol, and be subjected to random searches of his premises and blood-testing.
The case is U.S. v. Kinnucan, 12-cv-163, U.S District Court, Southern District of New York (Manhattan).
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