Crusading US Attorney Preet Bharara, famous for bringing down two insider-trading rings associated with the hedge fund Galleon Group, has worked with the Federal Bureau of Investigation and the Securities and Exchange Commission to bring down another insider-trading ring, this one comprised of analysts and hedge fund employees who illegally profited or avoided losses to the tune of $61.8m.
The insider-trading scheme involved inside information on PC and server maker Dell and graphics and SoC chipmaker Nvidia, and involved seven different employees of analyst and trading companies who gained access to that information through friends, and then executed trades based on that data.
"The charges unsealed today allege a corrupt circle of friends who formed a criminal club whose purpose was profit and whose members regularly bartered lucrative inside information so their respective funds could illegally profit, " Bharara explained in a statement Wednesday afternoon.
"And profit they allegedly did – to the tune of more than $61m on illegal trades of a single stock – much of it coming in a $53 million short trade," he said. "Here, The Big Short was The Big Illegal Short. We have demonstrated through our prosecutions that insider trading is rampant and has its own social network, a network we intend to dismantle. We will be unrelenting in our pursuit of those who think they are above the law."
The link between Dell and the insiders appears to be Sandeep Goyal, who worked at the computer maker from 2003 to 2006, and who was friends with an unnamed co-conspirator who worked in Dell's investor relations department and who talked out of turn. (Most recently, Goyal was a technology analyst with wealth-management firm Neuberger Berman, which was spun out of the defunct Lehman Brothers brokerage firm back in 2008.)
Having obtained this inside info, Goyal then shared information about Dell's upcoming quarterly results with another unnamed co-conspirator at a hedge fund, and this information was shared among the rest of the hedgies.
In one case, tips about Dell's April 2008 quarter were passed on a month ahead of time, and the co-conspirators were able to realize at least $1m in illegal profits from the trades. A quarter later, having been alerted to the fact that Dell's July 2008 quarter was not going to be so hot, the insiders shorted Dell stock and raked in $53m – what Bharara said was the largest single insider trade in history – well, that anyone has been caught doing, anyway. At the end of August, when Dell reported its July 2008 results, the company's stock dropped 13 per cent.
In exchange for being the conduit of this information, Goyal was paid $75,000 in 2008 and $100,000 the following year, according to the lawsuit filed on Wednesday.
Those charged include Anthony Chiasson, a cofounder of the Level Global Investments hedge fund; Spyridon Adondakis, also of Level Global; Todd Newman, formerly a trader at the Diamondback Capital Management hedge fund; Jesse Tortora, also formerly of Diamondback; Jon Horvath, an analyst at Sigma Capital (a unit of SAC Capital Advisors); and Danny Kuo, an analyst at Whittier Trust. Kuo was the link to insider information on Nvidia's financial results, but the suit does not say that any of the insiders traded on this information.
Tortora, Adondakis, and Goyal are cooperating with the Feds and have already each pled guilty to one charge of conspiracy to commit securities fraud and one count of securities fraud. The others face the same charges. The conspiracy charge has a sentence of a maximum of five years in prison and a fine of $250,000 or twice the gross gain or loss from the offence. The securities fraud charge carries a maximum potential penalty of 20 years in prison and a maximum fine of $5m.
The co-conspirators were nabbed in part by the email and instant-message trails they left behind. Raj Rajaratnam, the founder of the Galleon Group hedge fund that is now serving an 11 year prison term, was brought down by mobile-phone taps. ®