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High-Tech Caught in Insider Trading Scandal

Nearly all of the 14 people charged so far with insider trading in a US government sting operation on expert network firms have pleaded guilty or been convicted. But the investigation is far from over. With the mountain of evidence the government has collected, more technology industry executives and mid-level managers could be charged in the next six months.

The background: In late 2010 and early 2011, the government arrested and filed both criminal fraud and civil insider trading charges against four managers at AMD, Dell, Flextronics, and TSMC. These mid-level executives had been moonlighting as consultants for Primary Global Research LLC (PGR), an expert network firm. PGR and other expert network firms maintain a pool of industry experts as part-time consultants and match them with clients who want to learn quickly about specific industries, companies, and technologies.

These experts are often independent consultants or retired executives, but some expert network firms also use employees of public companies. The firms pay the consultants hundreds of dollars per hour to participate in calls with the firms' clients, which include investors, hedge funds, traders, private equity firms, venture capital firms, professional service firms, strategic consulting firms, and corporations. The firms charge clients annual retainers of tens of thousands of dollars for access to the experts, according to the government's charges.

As of July 1, three of the four men arrested had pleaded guilty. These include Mark Anthony Longoria, a former supply-chain manager with {complink 103|Advanced Micro Devices Inc. (AMD)}; Manosha Karunatilaka, an account manager at {complink 5388|Taiwan Semiconductor Manufacturing Co. (TSMC)}; and Daniel DeVore, a former global-supply manager at {complink 1544|Dell Inc.}. The fourth man, Walter Shimoon, a former senior director of business development at {complink 2085|Flextronics Corp.}, is rumored to be near a plea deal.

Most of the others arrested and charged, including employees and associates of PGR as well as hedge fund managers and analysts, have also either pleaded guilty or been tried and convicted. (A complete list of the people involved and their statuses is available here.) Only one case remains — that of James Fleishman, a former salesperson for PGR, who has pleaded not guilty and awaits trial.

It's impossible to know how many tech managers and executives have worked as consultants for expert network firms, but the investigation shows the firms are an easy and tempting way for tech people to pick up extra cash. According to their plea agreements, the tech executives made a lot of money as PGR consultants. For example, Longoria, who admitted to divulging confidential information in 2006 about Western Digital as well as AMD revenue and gross margin in 2008 and 2009, made approximately $200,000.

Although PGR stepped way over the line, expert network firms in general appear to be a rather gray area. There is nothing illegal about connecting investors with industry experts. However, it becomes questionable when that “expert” is an employee of a public company, especially when that employee has access to material non-public information. It's not clear the extent to which technology firms have had policies about whether their employees could moonlight for such firms. If they didn't and don't, they certainly should now.

There are plenty of signs that the government is just getting started. First, the US attorney's office has said so. “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,” said Manhattan US Attorney Preet Bharara when he announced the charges last December.

“Over the next many months and beyond, we will continue to enforce the law, police the market, and protect honest businesses and their shareholders by working methodically with the FBI and SEC to root out corporate corruption and insider trading.”

Some observers believe the government's success in prosecuting the 14 expert-network cases has encouraged it to proceed. And the government has no shortage of leads to follow up on. In a court filing related to Fleishman's upcoming trial, his lawyer said that the government has 300 hours of wiretaps containing conversations with some 250 consultants, 11,000 pages of instant messages between hedge funds and Primary Global employees, and 6,500 pages of email.

A renewed effort may already be underway. The Wall Street Journal cites anonymous sources saying that the Federal Bureau of Investigation has been approaching potential suspects and showing them incriminating wiretaps to try to convince them to admit guilt or cooperate with the investigation. In addition to wiretaps, the government has “a mountain of evidence seized by subpoena from hedge funds and consulting firms in recent months,” the sources told the WSJ.

At least 25 high tech companies are mentioned in the government's filings, including Apple, Broadcom, Google, Intel, Research in Motion, and Sun Microsystems. (A complete list of companies is available here.) Although being mentioned does not mean that the company broke any law or is being accused of any wrongdoing, the government may have wiretaps or evidence that implicates individual employees at certain companies. Given the trove of material and the renewed vigor of the government prosecutors, it would be surprising if more high-tech employees are not implicated in coming months.

9 comments on “High-Tech Caught in Insider Trading Scandal

  1. Eldredge
    July 6, 2011

    Anyone involved with these types of consulting opportunities has to be very careful. Unfortunaltely, I am sure there is a lot of pressure in these conference calls to divulge as much information as possible.

  2. Tam Harbert
    July 6, 2011

    Absolutely. In my reporting on the topic, sources have told me how they are sometimes pressured to divulge information. If you're making $350/hour to participate in the call, there's plenty of pressure for you to say something valuable!

  3. Anand
    July 6, 2011

    I think companies should make sure that their employees are not working as consultants. They should keep any eye on their employees activity, atleast of those employees who have sensitive information about the company.

  4. Tam Harbert
    July 6, 2011

    I agree. It's not clear whether companies have been keeping a very close eye on such employees. (Most high tech companies aren't willing to discuss this.) But it is clear that they should be putting strict controls in place now.

  5. Eldredge
    July 6, 2011

    It is too easy for a conflict of interest to occur. I assume in the past that companies have thought that it was sufficient that employees understand insider information laws (and at these executive levels, they certainly should/do).

  6. Taimoor Zubar
    July 6, 2011

    I do agree that companies need to keep an eye on their employees to ensure that they are not divulging any company information outside. However, I think this is practically impossible. Given the use of technology, it's so easy to sneak sensitive information out from the company and transmit it to other companies without leaving a trace. At the end of the day the trust you have on your employees supersedes your monitoring and surveillance systems.

  7. HM
    July 6, 2011

    It is right to say that a consultant or employee should not divulge inside information.

    But who are they leaking information to? Can we see it this way -> An employer collecting information from other employer through illegal means.

    So instead of monitoring its own employees the companies/employers themselves should have a clean code of conduct when they are dealing with consultants and employees who are not theirs.

     

  8. jbond
    July 7, 2011

    I think the biggest issue here is that the government is finally cracking down on this type of behavior. This has been going on for a long time and usually ends up with a “slap on the wrist” if they are even caught. Maybe now more people will have second thoughts before they take part in questionable behavior.

  9. UdyRegan
    September 20, 2018

    Though many have been convicted or pleaded guilty, the pool of criminals out there is still shockingly huge. This is rather expected as the industry that we are dealing with is just as extravagant. There are countless opportunities to be laid out for everyone who knows how to work the market around though through illegal means. A stop could be put to this situation even if it means putting in a lot of efforts.

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