Seven Charged in Insider Trading Probe

By Patricia Hurtado and Bob Van Voris - Jan 19, 2012 8:43 AM GMT+0700

Seven men, including fund managers and analysts, were accused by the U.S. of forming a “criminal club” of friends and co-workers who reaped almost $62 million in illicit profits from insider trading in Dell Inc. (DELL) shares.

Manhattan U.S. Attorney Preet Bharara alleged that the scheme included one trade that earned a $53 million illegal windfall for Level Global Investors LP co-founder Anthony Chiasson and his fund. The insider-trading ring, which involved five different hedge funds and investment firms, is the largest identified by the U.S. to date to involve a single stock, federal authorities said.

Chiasson, Todd Newman, a portfolio manager formerly at Diamondback Capital Management LLC, Jon Horvath, a hedge fund analyst in New York, and Danny Kuo, a fund manager for Whittier Trust Co. in South Pasadena, California, were taken into federal custody this morning, said Janice Fedarcyk, head of the Federal Bureau of Investigation’s New York office.

The charges “paint a stunning portrait of organized corruption on a grand scale,” Bharara said today at a news conference. “It describes a circle of friends who essentially formed a criminal club, whose purpose was profit and whose members regularly bartered lucrative inside information. It was a club where everyone scratched everyone else’s back.”

Galleon Group Scale

The U.S. said the illegal profits earned as a result of the scheme were almost of the same “magnitude of fraud we proved in the Galleon Group insider trading scheme,” Bharara said.

A five-year insider-trading probe by Bharara’s office and the FBI has resulted in charges against 63 people, Fedarcyk said. More than 50 have pleaded guilty or been convicted after trial since 2009, including Galleon Group LLC co-founder Raj Rajaratnam.

Rajaratnam, was found guilty in May and is serving 11 years in prison, the longest ever for insider trading. He made $72 million from his illicit tips, evidence showed. Several other technology company employees and fund managers have been convicted of receiving nonpublic information as a result of the probe.

At today’s press conference, Bharara displayed a flowchart placing Sandeep Goyal, a former Dell employee, at the center of the ring. According to the U.S., an unnamed person in the Dell investor-relations department passed secret earnings information to Goyal, who passed it on to Jesse Tortora of Diamondback.

Circle of Friends

Tortora, Horvath, Kuo and Spyridon “Sam” Adondakis, a Level Global analyst, were friends who shared inside information on public technology companies, including Dell, prosecutors said. The ring traded the information in 2008 and 2009, according to the U.S.

Tortora passed the inside information on Dell to Newman before the computer maker announced its first- and second- quarter 2008 earnings, according to the U.S. Newman made $3.8 million in illegal profits for his hedge fund from trading on the information, according to the U.S. Tortora also passed tips to Kuo, Horvath and Adondakis.

Adondakis passed the Dell information to his colleague Chiasson and others at Level Global, according to the charging documents. They allegedly traded on the tips for $57 million in illegal profits.

Adondakis, Tortora and Goyal pleaded guilty last year to securities fraud and conspiracy charges that were unsealed today, Bharara said. They are cooperating with the government’s investigation, he said.

‘More Disturbing’

Robert Khuzami, the head of enforcement at the U.S. Securities and Exchange Commission, which filed a related suit today against the defendants, said the cases describe actions “far more disturbing” than insider trading committed by someone who obtains one illegal tip.

“Today’s actions lay bare an organized network of analysts and fund managers who set up and used a corrupt network to obtain inside information,” Khuzami said. “These cases, along with Galleon and expert networking cases, reflect systemic dishonesty and exposes a deeply-embedded level of corruption.”

Horvath, 42, is an analyst at Connecticut-based hedge fund Sigma Capital Management LLC, said a person with knowledge of the matter who wasn’t authorized to speak because the information wasn’t public. He was arrested by the FBI this morning at his home in Manhattan, the U.S. said, and released on a $750,000 bond after a court appearance before U.S. Magistrate Judge James Cott in New York.

‘Honesty and Integrity’

“Throughout a more than 10-year career as a respected investment analyst, Jon Horvath has conducted himself with honesty and integrity,” Horvath’s lawyer, Steven Peikin, said after court. “He has done nothing wrong, and the charges brought against him today will be shown to be meritless.”

Chiasson, 38, used inside information to win for his Level Global fund what the U.S. said was a single “enormous bet” of $53 million on Dell earnings, prosecutors claimed.

“This is the largest single trade ever charged in the Southern District in an insider trading case,” Assistant U.S. Attorney David Leibowitz said today at a bail hearing, referring to the federal jurisdiction that includes Wall Street.

Greg Morvillo, Chiasson’s lawyer, argued that Leibowitz was attributing to his client trades made by others at Level Global.

Chiasson, who turned himself in to U.S. authorities this morning, was released on $2.5 million bond to be secured by $1.25 million in cash or property and three co-signers. Morvillo said in court that his client is innocent of the charges.

“He will be here to defend these charges, whether it’s tomorrow, next month or next year,” Morvillo told Cott.

Newman, 47, was released on a $3 million bond after appearing in U.S. District Court in Boston today.

Kuo, 36, who was arrested today in California, was released on $300,000 bond after appearing in federal court in Los Angeles.

Facing 25 Years

Newman of Needham, Massachusetts, Chiasson of New York, Horvath of New York and Kuo of San Marino, California, are each charged with one count of conspiracy to commit securities fraud and one count of securities fraud. They face as long as 25 years in prison if found guilty, prosecutors said.

Goyal is a former junior technology analyst at Neuberger Berman, said Alexander Samuelson, a company spokesman. Goyal left the firm this month. Goyal, who didn’t trade on the information, was paid about $175,000, by Tortora through an intermediary, for the tips, Bharara said. Goyal worked for Dell at its corporate headquarters in Round Rock, Texas, from 2003 until the summer of 2006, prosecutors said.

Justine Harris, a lawyer for Adondakis; Jessica Margolis, who represents Goyal; Alfred Pavlis, who represents Newman; and Ralph Caccia, who represents Tortora, didn’t return phone messages seeking comment.

FBI Searches

In November 2010, FBI agents from New York and Boston executed search warrants at the offices of Level Global and Diamondback, hedge funds founded by former employees of SAC Capital Advisors LP.

Level Global told clients last February that it was shutting down -- eight years after David Ganek and Chiasson founded the hedge fund -- because of the U.S. probe.

Steven Goldberg, a spokesman for New York-based Level Global, didn’t return a call seeking comment on the arrests.

Diamondback, in a letter to investors today, said it has cooperated with U.S. authorities. It said Newman left the firm after the 2010 search and Tortora resigned in April 2010.

Civil Complaint

The SEC’s civil insider-trading complaint was filed in Manhattan federal court against all seven men, Diamondback Capital and Level Global. In addition to the alleged Dell insider trades, the SEC claims members of the ring traded on inside information about chipmaker Nvidia Corp. (NVDA) Level Global made at least $15.6 million in illegal profits on its Nvidia trades, the agency claimed.

Peter Neiman, of Wilmer Hale, a lawyer for Diamondback Capital, declined to comment on the SEC lawsuit. MaryJeanette Dee, a lawyer for Level Global, didn’t immediately return a voice mail left at her office seeking comment on the suit.

During the trial last year of James Fleishman, a former executive at Primary Global Research LLC, witnesses testified that he helped employees of technology companies pass nonpublic information to his expert-networking firm’s fund manager clients. Fleishman was convicted of conspiracy charges related to insider trading.

One witness, Mark Anthony Longoria, a former Advanced Micro Devices Inc. employee, described how he passed secret tips and other information about his company to fund managers, including Adondakis.

Primary Global

Bob Nguyen, a former Primary Global analyst who pleaded guilty and agreed to cooperate with the U.S., testified at Fleishman’s trial that Tortora was a client of Fleishman’s who got nonpublic information about technology companies through the Mountain View, California-based research firm.

Daniel Devore, a former global supply manager of Dell, pleaded guilty and is cooperating with the U.S. insider-trading investigation.

The criminal case is U.S. v. Newman, 12-00124, U.S. District Court, Southern District of New York (Manhattan). The civil case is Securities and Exchange Commission v. Adondakis, 12-00409, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Patricia Hurtado in New York federal court at pathurtado@bloomberg.net; Bob Van Voris in New York federal court at rvanvoris@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net