U.S. arrests 4 in widening insider trading probe

By Matthew Goldstein and Grant McCool

NEW YORK (BestGrowthStock) – Four people were arrested on charges of leaking secrets about technology companies to hedge funds, including details about Apple Inc (Read more about Apple stock future.)’s iPad ahead of its launch, in a widening U.S. probe into insider trading.

Authorities said another person, a former employee of Dell Inc, had pleaded guilty on December 10 to charges he had provided inside information about the company from late 2007 to August 2010 to research firms and hedge fund managers.

The case stems from a more than two-year investigation of hedge funds that intensified on November 22 when federal agents raided Loch Capital Management in Boston, Diamondback Capital Management in Stamford, Connecticut and Level Global Investors in New York. All said they were not targets of the probe.

Thursday’s announcement by U.S. authorities focused on people hired as consultants to hedge funds by Primary Global Research, a California-based “expert network” firm.

One of those charged, Manosha Karunatilaka, an account manager for Taiwan Semiconductor Manufacturing Co Ltd in Burlington, Massachusetts, had dealt with Level Global while he was consulting for the California firm, a source briefed on the investigation said.

The investigation comes as the U.S. Department of Justice, which has failed to win any major convictions tied to the 2008 financial crisis, is trying to flex its muscles in prosecuting Wall Street crime.

Those arrested included three technology company executives and a salesman for Primary Global, which had hired the three to work as consultants to fund managers on the tech industry.

“Today’s charges allege that a corrupt network of insiders at some of the world’s leading technology companies served as so-called ‘consultants’ who sold out their employers by stealing and then peddling their valuable inside information,” Manhattan U.S. Attorney Preet Bharara, whose office filed the case, said in a statement.

The probes into corporate corruption and insider trading will continue “over the next many months and beyond,” he said.

In many ways, Thursday’s charges spring from the investigation that led to the October 2009 arrest of Galleon Group hedge fund co-founder Raj Rajaratnam and dozens of others executives and traders. Rajaratnam has pleaded not guilty and is set to go on trial in February.

Some of the evidence that led to the filing of charges against Primary Global consultants stems from secretly recorded telephone conversations and testimony provided by five cooperating witnesses.

Those arrested include an executive who worked for Flextronics International Ltd, a Singapore-headquartered company that makes power adaptors and other parts for Apple and other big tech companies.

The technology company executives charged were Walter Shimoon, 39, of San Diego, California, who worked at Flextronics; Mark Anthony Longoria, 44, who was employed by chip maker Advanced Micro Devices Inc as a supply chain manager in Round Rock, Texas; and Karunatilaka, 37, of Marlborough, Massachusetts.

Primary Global Research said it no longer worked with the three consultants and that it had placed the salesman who was charged, James Fleishman, 41, on leave.

Daniel DeVore, formerly a global supply manager for Dell, who also worked as a consultant for the research firm, pleaded guilty to wire fraud and conspiracy charges, according to court records. His lawyer, Johnny Sutton, declined to comment.

The firm paid DeVore and the three other consultants a combined total of more than $400,000 between January 2008 and March 2010, the criminal complaint said. It said Fleishman earned a total of $585,000 in 2008 and 2009.

TOP SECRET

Hedge funds pay networking firms to be linked up with industry experts, who are supposed to offer insight on trends and how sectors work. Instead, the government said that in this case the experts were revealing information about sales and profits that gave certain investors an edge in trading.

“The government is not only serious about bringing all its resources to bear — they also recognize that the economic recovery cannot be fully implemented until investors trust the market,” said Michael Robinson, a former policy chief at the Securities and Exchange Commission who is now at Levick Strategic Communications.

The hedge funds that allegedly received the inside tips were not identified. But in the complaint, authorities said some of the information was obtained from a hedge fund analyst who has not been charged with any crime but admitted “to participating in obtaining material, nonpublic information.”

The FBI arrested two of the men in California, one in Texas and one in Massachusetts. They were charged with wire fraud and conspiracy in the court papers filed in U.S. District Court in Manhattan.

Karunatilaka’s lawyer, Brad Bailey, said his client made an initial appearance in Boston federal court and would be released on $300,000 bond secured by $25,000 in cash.

“This is the first we have known about these charges and we are reviewing the complaint,” Bailey said.

Fleishman appeared before a federal magistrate in San Jose, California, and was released on $700,000 bond, a spokesman for the U.S. Attorney’s office in San Francisco said.

A lawyer for Longoria could not be reached. The name of Shimoon’s lawyer was not immediately known.

CODE NAME K48

The government said it had intercepted phone calls in which Shimoon, a senior director of business development at Flextronics, leaked inside information about the release of the iPad as well as an updated version of the iPhone.

Flextronics was privy to those details in 2009 as an Apple supplier, according to the complaint. The iPad was launched earlier this year.

Referring to a top secret Apple project whose code name was K48 and which eventually become the iPad tablet computer, Shimoon is quoted in court papers as saying in an October 2009 telephone call: “At Apple you can get fired for saying K48 … outside of a, you know, outside of a meeting that doesn’t have K48 people in it. That’s how crazy they are about it.”

Flextronics said it had clear policies prohibiting the release of confidential information and that its employee charged in the case has been terminated.

The court papers also said that Longoria, who worked for AMD, had told several Primary Global clients what AMD’s second-quarter 2009 revenue numbers and other financial data would be before they were officially released.

Longoria, who AMD said resigned in October, is accused of leaking tips to a hedge fund manager who is cooperating with the government. This hedge fund manager, Richard Choo-Beng Lee, pleaded guilty in the Galleon case and has emerged as one of the main government cooperators.

Expert network firms play matchmaker to hedge fund managers eager to connect with industry experts in technology, healthcare and other areas. There are an estimated three dozen such firms, with premium networking services costing investor clients more than $1 million a year.

(Additional reporting by Svea Herbst-Bayliss, Emily Chasan, Martha Graybow and Dan Levine; Editing by Ted Kerr)

U.S. arrests 4 in widening insider trading probe