U.S. arrests 4 in widening insider trading probe

NEW YORK Thu Dec 16, 2010 5:57pm EST

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NEW YORK (Reuters) - Four people were arrested on charges of leaking secrets about technology companies to hedge funds, including details about Apple Inc's iPad ahead of its launch, in a widening U.S. probe into insider trading.

Authorities said another person, a former employee of Dell Inc, had pleaded guilty on December 10 to charges he had provided inside information about the company.

The case is part of a widening insider trading probe that intensified with a string of raids on hedge funds last month and subpoenas for information about their activities.

The investigation comes as the Justice Department, which has failed to win any major convictions tied to the 2008 financial crisis, is trying to flex its muscles in prosecuting Wall Street crime.

Those arrested included three technology company executives and a salesman for an "expert network" firm that hires industry consultants to advise fund managers about the tech sector.

"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," Manhattan U.S. Attorney Preet Bharara, whose office filed the case, said in a statement.

The probes into corporate corruption and insider trading will continue "over the next many months and beyond," he said.

Those arrested on Thursday include an executive who worked for Flextronics International Ltd, a Singapore-headquartered company that makes power adaptors and other parts for Apple and other big tech companies.

The tech company executives charged were Walter Shimoon, 39, of San Diego, California, who worked at Flextronics; Mark Anthony Longoria, 44, who was employed by chip maker Advanced Micro Devices Inc as a supply chain manager in Round Rock, Texas; and Manosha Karunatilaka, 37, of Marlborough, Massachusetts, who worked as an account manager for Taiwan Semiconductor Manufacturing Co Ltd.

All were hired as consultants by California-based expert networking firm Primary Global Research. The firm said it no longer worked with the three, and had placed the salesman who was charged, James Fleishman, 41, on leave.

Daniel DeVore, formerly a global supply manager for Dell, who worked as a consultant to the expert networking firm, pleaded guilty to related wire fraud and conspiracy charges.

Hedge funds pay networking firms to be linked up with industry experts, who are supposed to offer insight on trends and how sectors work. Instead, the government said that in this case the experts were revealing information about sales and profits that gave certain investors an edge in trading.

The hedge funds that allegedly received the inside tips were not identified. But in the complaint, authorities said some of the information was obtained from a hedge fund analyst who has not been charged with any crime but admitted "to participating in obtaining material, nonpublic information."

TOP SECRET

The FBI arrested two of the men in California, one in Texas and one in Massachusetts. They were charged with wire fraud and conspiracy in the court papers filed in U.S. District Court in Manhattan.

Karunatilaka's lawyer, Brad Bailey, said his client made an initial appearance in Boston federal court and would be released on $300,000 bond secured by $25,000 in cash.

"This is the first we have known about these charges and we are reviewing the complaint," Bailey said.

Lawyers for Longoria, Fleishman and DeVore were not immediately available. The name of Shimoon's lawyer was not immediately known.

Apple, Flextronics, AMD, Taiwan Semiconductor and Dell are all assisting in the investigation, authorities said.

Dell said it "is committed to the highest standards of ethics and integrity" and will "cooperate fully with law enforcement authorities."

AMD said it was victim in the case and that Longoria had resigned in October.

The government said it had intercepted phone calls in which Shimoon, a senior director of business development at Flextronics, leaked inside information about the release of the iPad as well as an updated version of the iPhone.

Flextronics was privy to those details in 2009 as an Apple supplier, according to the complaint. The iPad was launched earlier this year.

Referring to a top secret Apple project whose code name was K48 and which eventually become the iPad tablet computer, Shimoon is quoted in court papers as saying in an October 2009 telephone call: "At Apple you can get fired for saying K48 ... outside of a, you know, outside of a meeting that doesn't have K48 people in it. That's how crazy they are about it."

Flextronics said it had clear policies prohibiting the release of confidential information and that its employee charged in the case has been terminated.

The court papers also said that Longoria, who worked for AMD, had told several Primary Global clients what AMD's second-quarter 2009 revenue numbers and other financial data would be before they were officially released.

Longoria is accused of leaking tips to a hedge fund manager who is cooperating with the government. This hedge fund manager, Richard Choo-Beng Lee, had complimented Longoria's work to an executive at Primary Global, the complaint said.

The charges are part of a long-running insider trading investigation that included the 2009 charges against Galleon Group hedge fund founder Raj Rajaratnam and a score of others. Rajaratnam, who is free on bail, is set to go on trial next year.

A hallmark of the Galleon prosecution and the broadening case has been the government's use of court-approved wiretaps, tools traditionally used to prosecute organized crime and drug cases.

EXPERT "MATCHMAKERS"

Expert network firms play matchmaker to hedge fund managers eager to connect with industry experts in technology, healthcare and other areas. There are an estimated three dozen such firms, with premium networking services costing investor clients more than $1 million a year.

Longoria was paid more than $200,000 by Primary Global for consulting services from January 2008 to March 2010, according to the court papers. Karunatilaka received $35,000 from the firm between January 2008 and June 2010, while Shimoon was paid $22,000 during the same period the complaint said.

A person familiar with the case told Reuters that Karunatilaka had been approached this past summer by federal agents who sought his cooperation with the investigation.

The source said that Karunatilaka, while working for Primary Global, was approached by a number of hedge funds to provide information. The source said that one hedge fund he had dealt with was Level Global, whose offices were raided by the FBI in November.

(Additional reporting by Svea Herbst-Bayliss, Emily Chasan and Martha Graybow; Editing by Ted Kerr)

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