7 Charged In Staggering $78M Insider Trading Probe
January 19, 2012

7 Charged In Staggering $78M Dell Insider Trading Probe

Federal authorities announced on Wednesday that they had charged seven financial analysts and money managers across the country with a $78 million hedge fund insider trading scheme, in one of the largest sweeps in the government´s years-long investigation of suspicious trading at hedge funds.

U.S. Attorney Preet Bharara, the chief federal New York prosecutor, described the ring as "a club where everyone scratched everyone else's back."

"Today's charges illustrate something that should disturb all of us: They show that insider trading activity in recent times has, indeed, been rampant and routine and that this criminal behavior was known, encouraged and exploited by authority figures in several investment funds," he said.

The FBI in New York arrested four financial employees on Wednesday, while authorities announced previously secret charges against three others.

According to criminal complaint documents, the four arrested by the FBI were charged, while the three people previously charged have already entered guilty pleas and are cooperating with investigators.

The seven were charged with securities fraud and conspiracy, and also face civil charges from the Securities and Exchange Commission (SEC).  Two of the hedge fund companies involved in the scheme also face civil charges.

Authorities allege the team of seven netted illegal profits of $62 million on trades made after unlawfully sharing non-public information about Dell Inc. in 2008-2009.

In separate, but related, charges, the SEC said the seven had illegally traded shares of tech firm Nvidia, bringing the total alleged gains from the illegal activity to $78 million.

The criminal complaint is based on information provided from the three who had previously pled guilty in hopes of obtaining a lighter sentence, along with consensually recorded conversations, wiretaps, phone records, trading records, emails and other documents obtained from two hedge funds.

The arrests announced Wednesday coincide with a four-year-old FBI probe -- dubbed Operation Perfect Hedge -- of Wall Street insider trading.

Bharara said Wednesday that, to date, 63 people have been charged with insider trading offenses, 56 of which had been convicted.

The highest profile target so far has been Raj Rajaratnam, the billionaire founder of the Galleon hedge fund, who was sentenced to a record 11 years in prison last year.

His friend, Rajat Gupta, former Goldman Sachs director and head of McKinsey & Co., faces trial this year on insider trading charges.

Wednesday's arrests included Level Global hedge fund co-founder Anthony Chiasson, who surrendered in New York, Todd Newman, a former trader with Diamondback Capital Management hedge fund, who was arrested in Boston, tech stock analyst Jon Horvat, who was arrested in New York, and fund manager Danny Kui, who was arrested in Pasadena, California.

A critical link in the alleged scheme was Sandeep Goyal, a former Dell employee who had left the computer giant to join a global asset management firm in New York.

Once there, Goyal continued to receive insider information from an as-yet unnamed source within Dell, authorities allege.  Goyal then spread the information among his friends at five or more investment houses, including three hedge funds, in a scheme Bharara described as a “stunning portrait of organized corruption on a broad scale.”

The SEC said that Level Global netted $72.6 million from the trades, while Diamondback made $3.9 million.

Goyal is among the three people previously charged who have pled guilty to charges of conspiracy and securities fraud, and is now cooperating with authorities.

"These are not low-level employees succumbing to temptation by seizing a chance opportunity. These are sophisticated players who built a corrupt network to systematically and methodically obtain and exploit illegal inside information again and again at the expense of law-abiding investors and the integrity of the markets," said Robert Khuzami, director of SEC enforcement.

Such lack of transparency can pose a "grave threat to the integrity of the markets and the level playing field that is the foundation of those markets" when they use their sizable market power to influence those who hold inside information, he said.


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