US charges seven over $62m insider trading

Khuzami, from the Securities and Exchange Commission, said recent cases reflect ‘systemic dishonesty’ [Reuters]

US prosecutors have charged seven people, described as a circle of friends who formed a criminal club, with running a $62m insider-trading scheme, in the latest case of a years-long investigation into suspicious trading at hedge funds.

The Federal Bureau of Investigation (FBI) arrested four people on Wednesday, and authorities announced previously secret charges against three others, making it one of the largest sweeps so far in the government’s investigation.

The seven charged worked for five different hedge funds and investment firms and reaped nearly $62m in illegal profits on trades in Dell, the US computer manufacturer, the prosecutors said.

That is similar in magnitude to insider trading gains made by Raj Rajaratnam, the convicted founder of the Galleon Group hedge fund.

The charging document told “by now, a sadly familiar story,” Preet Bharara, a Manhattan US attorney, said 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.”

Arrests

The defendants arrested on Wednesday include Anthony Chiasson, who co-founded the Level Global Investors hedge fund.

A US magistrate judge released him on $5m bail after he turned himself in to the FBI in New York, an agency spokesman said. Chiasson has denied the charges.

Todd Newman, who headed technology trading for hedge fund Diamondback Capital Management from Boston, was also arrested.

Diamondback said in a letter to investors on Wednesday that it had been “proactively assisting” criminal prosecutors and the SEC in the case against Newman and another former employee, Jesse Tortora.

Chiasson and Newman are accused of illegally trading ahead of Dell’s earnings announcements for the first and second quarters of 2008, netting them profits, respectively, of $57m and $3.8m.

Another defendant, Jon Horvath, is accused of making an illegal $1m trade in Dell.

Horvath was released on $750,000 bail after a court appearance in New York.

Quarterly earnings

In a parallel civil action, the SEC said investment analyst Sandeep “Sandy” Goyal of Princeton, New Jersey, obtained Dell quarterly earnings information and other performance data from an insider at Dell in advance of earnings announcements in 2008.

Goyal tipped Tortora with the inside information, and Tortora in turn tipped several others, leading to insider trades on behalf of Diamondback and Level Global hedge funds.

The fourth man arrested was California-based hedge fund manager Danny Kuo, officials said.

A Dell representative said the company had co-operated with authorities.

The SEC charged Diamondback Capital and Level Global as well as the individuals.

Chiasson, Newman, Horvath and Kuo were charged in US District Court in Manhattan with one count each of conspiracy to commit securities fraud, according to court documents.

‘Systemic dishonesty’

Dubbed “Operation Perfect Hedge” by the FBI, the bureau’s sweeping probe has examined suspected sharing of confidential business information with hedge fund managers and analysts.

Rajaratnam was arrested as part of the investigation and is now serving an 11-year prison term following his conviction last year.

Robert Khuzami, the enforcement division chief at the Securities and Exchange Commission (SEC), said the cases, along with Galleon and prosecutions of some so-called expert network firms, “reflect systemic dishonesty and exposes a deeply-embedded level of corruption”.

Janice Fedarcyk, FBI assistant director-in-charge, said in a statement that the agency had arrested more than 60 people in the crackdown.

“This initiative is far from over,” she said. “If you are engaged in insider trading, what distinguishes you from the dozens who have been charged is not that you haven’t been caught; it’s that you haven’t been caught yet.”