How &Why Rajaratnam & IBM's hardware chief were arrested in Insider Trading Scam

tmarket · Oct 19, 2009

IBM Hardware Chief, Intel VC Exec Arrested in Insider Trading Scam
US Attorney Preet Bharara said it was the first time court-authorized wiretaps were used to uncover insider trading

IBM senior VP Robert Moffat (pictured), the head of IBM's Systems and Technology Group - in other words the guy who runs all of its hardware as well its microelectronics unit - and Intel Capital's director of strategic investment Rajiv Goel, one of its VC people, were arrested Friday morning on insider trading charges.

They were alleged tipsters.

The $20 million scam, involving AMD, Intel, IBM, Akamai, Clearwire and Google stock as well as Polycom's and Hilton Hotels', is said to be the biggest ever pulled off by a hedge fund and had the US Attorney, the FBI and the SEC doing a televised press conference on CNBC this afternoon.

US Attorney Preet Bharara said it was the first time court-authorized wiretaps were used to uncover insider trading.

Authorities also arrested billionaire hedge operator Raj Rajaratnam, the founder of the big $3 billion Galleon Group and manager of the Galleon Technology Funds, identified as the scam's kingpin and described as the richest Sri Lankan in the world, as well as McKinsey director Anil Kumar, and Danielle Chiesi and Mark Kurland of New Castle Partners, the old defunct Bear Stearns Asset Management equity hedge fund group. Kurland is president of New Castle.

Rajaratnam's phones were bugged so the FBI has him on tape. There is also testimony from an unidentified cooperating witness, who recorded some of the conservations and has agreed to plead guilty.

Rajaratnam, who acted on the insider information and was arrested on television hours before he was due to skip the country, was charged with four counts of conspiracy and nine counts of securities fraud. He's looking at a lot of jail time.

Rajaratnam reportedly suspected his conversations had been captured on tape and had booked a flight to Switzerland by way of London for Friday evening.

Moffat allegedly passed information on AMD's arrangements with Abu Dhabi to Chiesi, Rajaratnam's go-between, ahead of AMD spinning off its plants into a joint venture called GlobalFoundry. Rajaratnam was trying to time the market and ironically got burned. He bought 4.9 million shares of AMD way too late to make a killing.

When it still looked liked they would clean up, Chiesi knew she would turn into a "Martha [expletive] Stewart" if found out.

Moffat was party to the AMD deal in his capacity as head of IBM Microelectronics because IBM would be licensing the spun-off entity its technology. They were depending on him for the deal's timing and details.

Moffat also allegedly passed on insider information on IBM and Sun to Chiesi, who told Kurland, and New Castle traded on it, making $500,000 on IBM and $900,000 on Sun.

According to the bugged phone calls, Rajaratnam had notions of moving Moffat to "some company where we can trade well" to which Chiesi replied "I know. I know. I'm thinking of that too. Or just keep him at IBM, you know, because this guy is giving me more information...I'd like to keep him at IBM right now because that's a very powerful place for him. For us too." To which Rajaratnam replies, "Only if he become CEO." Then Chiesi says, "Well, not really. I mean, come one...you know, we nailed it."

Goel, who furnished information obtained on the job about Clearwire and other stocks, had a personal account at Charles Schwab managed by Rajaratnam.

Neither Intel nor IBM has returned calls.
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http://web2.sys-con.com/node/1147833

tmarket · Oct 19, 2009

http://virtualization.sys-con.com/node/1147998##

The United States government has accused Robert Moffat, IBMâs server chief, the guy who was negotiating to buy Sun, with betraying Sunâs financial position to Danielle Chiesi, an employee of New Castle Partners, a New York hedge fund, so she could trade on the insider information.

Moffat knew what Sunâs numbers were going to be because he was one of the nine IBMers doing due diligence at Sun this past January.

In a wire-tapped phone call Chiesi made to an unidentified person now cooperating with the governmentâs investigation she said, âIBM is looking at it as a takeover. The only reason my guy would know that is because itâs his deal. Like, heâs in bed with themâ¦.You see what I meanâ¦not because heâs just speculating.â

The news that IBM was negotiating to buy Sun didnât leak to the Wall Street Journal and hence to the world for another two months.

Armed with the foreknowledge allegedly provided by Moffat that Sun was going to beat the Street â top and bottom â when it reported its December â08 quarter, New Castle bought Sun shares just hours before Sun posted its numbers on January 27 and made a $900,000 killing on the deal.

The government says Moffat had practice slipping Chiesi insider financial information. When the global economy started melting down last year, he had dinner with her in early September, before IBMâs quarter closed, and reassured her that IBM would pull it out. According to a taped phone call with an unidentified affiliate of New Castle, she said, âHeâs saying, you know, [IBMâs] zSeries looks really good. Heâs saying that everything looks fine butâ¦it comes down to theâ¦final last week. But he thinks right now that they are on track. As of right now heâs not even worried a little bit, I mean, we think we can beat the numbers this quarter.â Chiesi apparently held onto her position in IBMâs stock.

Then again this past January, when IBM was due to report the results of its December quarter and Chiesi had spoken with Moffat New Castle covered a short position in IBM stock and began picking up more shares.

The government tap found her explaining to the person whoâs now a government witness, âIâm buying IBM going into the print,â Wall Street parlance for IBM posting its numbers. âIf I wasnât closer to the situation Iâd be, I would so short this fucking thing. But Iâm thinking they could beat, and they really could guide upâ¦.You know, my guy said easily they could, they could add 30 cents to the bottom line. Easily, easily. Thatâs what he says, to the bottom line in â09â¦.I donât think anybody is talking about a beat this quarter.â

The governmentâs complaint notes that on January 20 IBMâs Q4 earnings beat analyst expectations by 25 cents and that it expected to do 27 cents better this year than last.

The FBI figures New Castle was up about $500,000 on Moffatâs information.
Three months later Chiesi flat out asked Moffat what IBMâs quarter looked like. She was apparently told the company would miss on revenues by 7%, âmiss the short-term signings but make total signingsâ and earnings per share would be âgood,â which is exactly what happened on April 20.

Having made money on Sunâs financial results once, Chiesi got her âass kicked,â sheâs reported saying, on Sun stock when Oracle unexpectedly waltzed in with a $9.50-a-share bid to acquire the company on April 20, supporting the widely held perception that IBM was dumbfounded at the move.

Chiesi was short the stock allegedly because Moffat had told her Sunâs revenues would be down 27% when it reported its March quarter. The Street only estimated it would be down 17%. She was also gambling on Moffat telling her if IBM was going to buy Sun. She hadnât reckoned on Oracle or Moffat not knowing what was going on.

Moffat is charged with three counts of conspiracy to commit securities fraud, one each for Sun and IBM and the third for AMD, where Moffat in his capacity as head of IBM Microelectronics was in on AMDâs negotiations to spin off its factories into a joint venture with the government of Abu Dhabi. IBM would have to license the venture some of its technology.

In the AMD case they seem to have proven inept conspirators and Chiesi even had a pipeline into AMD in the form of a chatty unidentified AMD executive who apparently hasnât been charged with any crime. For all the reported discussions between Moffat and Chiesi of the dealâs structure, terms, voting rights, dilution, government approvals, management and timing of the announcement, the government thinks New Castle didnât profit from its trades in AMD stock âdue in part to a global financial crisis that precipitated a broad decline in stock markets in or about September and October 2008.â

New Castle had bought a swat of AMD at $5.44 and another at $4.50 pre-announcement and didnât begin selling until the price had sunk to $4.25. However, the governmentâs not sure that New Castle didnât avoid certain losses by selling put options the day before the announcement, which the hedge fund knew was set for October 7, 2008.

The FBI says Chiesi had been worried that she âwould make so much money that her trading might the attention of regulatorsâ so maybe she was relieved in a way.

By her own admission she would never have dabbled in AMD stock without having an inside track. She told New Castle president Mark Kurland that âUnless you were on the phone with [the AMD executive] and had Moffat at you house last night, who the fuck would be buying it honestly.â And to the alleged kingpin of the scheme, billionaire hedge fund manager Raj Rajaratnam, now out on $100 million bail, she was overheard to say she âwouldnât of touched [AMDâs stock] with a fucking 10-foot poleâ if she âwasnât close to the company.â

According to the US Attorney Moffat is looking at doing five years in jail and paying a fine of $250,000 or twice his gross gain or loss. His playmates are looking at worse.

Itâs unclear from either of the two complaints that the government filed with the federal court in New York Friday how exactly Moffat was to benefit financially from the intrigue.

He was the only one of the six people in the ring charged Friday to turn himself in. They went and arrested the others. Itâs unclear whether heâs still working for IBM, the company not being exactly forthcoming right now. His bio had disappeared from IBMâs site by early Saturday morning. IBM executives, by the way, are supposed to be well-compensated.
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MandelbrotSet · Oct 19, 2009

Sounds like he's up shit's creek without a paddle! ...

bwolinsky · Oct 19, 2009

What's so stupid to me in this case, is they made a paltry amount considering how much was under management. Manage 3 billion, make 20 million with an m. I mean, that wasn't even 1% for their shareholders. Obviously they enriched themselves, but they could have been doing that the whole time by frontrunning their clients with the amount of money they could put to work.

risktaker · Oct 19, 2009

Some Sri Lankans make a few $million illegally and end up in jail.

Goldman rapes 300 million fools for $billions every quarter and gets away with it.

Hmmm.

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How &Why Rajaratnam & IBM's hardware chief were arrested in Insider Trading Scam

tmarket

tmarket

MandelbrotSet

bwolinsky

risktaker