Silicon Valley culture ripe for insider trading

Thu Dec 16, 2010 4:22pm EST

* Silicon Valley famous as "gossip mill" - expert

* Information a precious commodity for tech investors

By Gabriel Madway and Dan Levine

SAN FRANCISCO, Dec 16 (Reuters) - Insider trading charges buffeting the technology industry have laid bare what people who work in Silicon Valley already know: leaks happen, and even the smallest morsel of information is a treasured commodity.

Because IT is a high-growth business driven by new and surprising technologies that emerge every day, a single piece of data can give disreputable investors the edge they need to cash in, experts say.

Three technology executives and a salesman for an "expert network" firm have been arrested and charged with leaking confidential information, U.S. federal prosecutors said on Thursday. The defendants are accused of illegally passing on tips to at least two unidentified hedge funds. [ID:nN16228432]

Prosecutors detailed leaks related to some of the most prominent names in technology, including chip maker Advanced Micro Devices Inc (AMD.N), personal computer maker Dell Inc DELL.O and, most notably, Apple Inc (AAPL.O).

Expert networking firms may have gained popularity in the Valley because of the area's "highly refined gossip mill," said Robert Weisberg, a professor at Stanford Law School.

"Things are probably looser and more informal here than they are in the East Coast financial world, so it's both ripe for this expert niche, but also ripe for all these clever new forms of misappropriation," Weisberg said.

Even a company like Apple, renowned for its obsession with secrecy, was apparently not safe from well placed leakers.

The complaint details a recorded phone call in October 2009 in which defendant Walter Shimoon, who worked at contract electronics manufacturer Flextronics International Ltd (FLEX.O), leaked confidential information about Apple's next-generation iPhone and the iPad, which at that time was only a rumor.

The iPad was so secret, it was known only by its code name, K48.

"It's a new category all together," Shimoon is quoted as saying, before speculating -- correctly -- that the iPad would not come equipped with a camera.

In the same conversation, Shimoon also correctly predicts that the next-generation iPhone will have two cameras.

"It'll be a neat phone 'cause it's gonna have (a) 5-megapixel auto-focus camera and it will have a VGA forward-facing video conferencing camera," Shimoon said, according to the complaint.

Long-time technology analyst Rob Enderle of the Enderle Group said technology is a key focus for many powerful investors, and the industry is simply wading through the sorts of insider trading scandals that once rocked pharmaceutical companies.

"There's just a huge amount of investment dollars focused on tech, and financial analysts chase each other for who has the best information," Enderle said.

"If you find out the next piece of information about the next Chevy truck, for example, I don't think it's going to move the stock very much. In tech, a little bit of information can make a big difference."

Charles King, who follows the tech sector as the principal analyst at Pund-IT, said, "I don't think greed and hubris are limited to tech."

"But any time that a market heats up or a company like Apple builds up a dominant position, then investor attention increases in lockstep. And as soon as you have the willing engagement of investors to get out ahead of the crowd, you create the possibility of corruption." (Reporting by Gabriel Madway and Dan Levine. Editing by Robert MacMillan)

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