WASHINGTON — Federal authorities announced criminal and civil charges Wednesday against seven investment fund managers and analysts whom they accuse of gaining more than $62 million in illicit earnings through insider information passed to them about Texas-based computer giant Dell Inc.
Four men were arrested early Wednesday in New York and Los Angeles, and another three already had pleaded guilty and were cooperating with prosecutors, the FBI and the Securities and Exchange Commission said at a joint news conference in Manhattan. The arrests are part of an ongoing four-year probe into insider trading in the hedge fund industry.
"Today's action lays bare an organized network of analysts and fund traders who set up and used a corrupt network to obtain insider information," said Robert Khuzami, the SEC's chief of enforcement.
The managers and analysts worked for or with two Connecticut-based hedge funds, Diamondback Capital Management LLC and Level Global Investors LP. Hedge funds are investment vehicles for the ultra-wealthy, often requiring that investors pony up $1 million or more in exchange for a chance at outsized returns.
Law enforcement officials said it was disconcerting that those charged weren't merely engaging in opportunistic behavior but instead were accused of setting up a "circle of friends" with the express purpose of exploiting nonpublic information obtained from Dell and the California-based tech firm Nvidia
"When you have the answer sheet in hand, it's pretty hard not to ace the test," said Janice Fedarcyk, the FBI assistant director in charge of the New York field office.
The federal officials said that inside tips about three 2008 quarterly earnings reports from Dell had allowed the alleged conspirators to rake in more than $62.3 million in illicit profits. The Nvidia insider trades netted them another $15.7 million, according to the SEC, the FBI and the U.S. Attorney's Office for the Southern District of New York.
Authorities said that Spyridon Adondakis, a former technology analyst at Level Global, Jesse Tortora, a former analyst for Diamondback Capital Management, and Sandeep "Sandy" Goyal, a former Dell employee, were cooperating with prosecutors.
Anthony R. Chiasson, a co-founder of Level Global, surrendered Wednesday in New York. FBI agents also took into custody Todd Newman, a former Diamondback trader in Boston, and Jon Horvath, who worked at Sigma Capital Management. Federal agents in Los Angeles arrested Danny Kuo, a vice president at Whittier Trust Co.
Goyal was at the center of the scheme, prosecutors alleged. He worked at Dell until 2006 and allegedly used his connections to get the company's quarterly earnings and other performance data from another employee in advance of announcements. He was compensated $175,000 for the tips, they said.
The information was passed to Tortora, of Pembroke Pines, Fla., who then tipped others in a "circle of friends" in order to bet collectively on or against Dell stock ahead of the rest of market participants, prosecutors said.
David Frink, Dell's director of corporate affairs, confirmed that the unidentified Dell worker left the company in May 2010, and he said Dell had cooperated with investigators.
"If the allegations are accurate, the action was a clear violation of Dell's policy regarding disclosure of material, nonpublic information. All Dell employees are required annually to complete training on the company's code of conduct, which includes a section on insider trading," Frink said. He added that the two former employees would have known they'd crossed a clearly marked line in terms of conduct.
Preet Bharara, the U.S. attorney for the Southern District of New York, was coy when he was asked at the news conference whether the unnamed former Dell worker had been charged.
"The Dell insider is not a defendant in the documents unsealed today," he said, leaving open the possibility of forthcoming charges.
Prosecutors allege in the criminal complaint that Kuo was behind the illicit trading on Nvidia stock, obtaining information from inside sources and sharing it with the "circle of friends."
Insider trading at hedge funds appears "rampant and routine," Bharara said, adding that "this criminal behavior was known and encouraged."
Bharara has successfully prosecuted more than four dozen people in the past two years for insider trading, including last year's high-profile conviction of hedge fund giant Raj Rajaratnam, who'd headed Galleon Group.
The arrests could play into the presidential campaign. Rivals in the party of Republican front-runner Mitt Romney are pummeling him for his Wall Street ties and enormous profits made while heading Bain Capital, a private equity firm. Private equity funds and hedge funds run in the same circle, trying to attract deep-pocketed investors. Should Romney win the Republican nomination, President Barack Obama is expected to try to associate him with Wall Street greed.
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