* John Kinnucan charged with fraud, conspiracy
* Ex-SanDisk exec Donald Barnetson pleads guilt
* Charges stem from broad U.S. insider trading probe
By Jonathan Stempel and Svea Herbst-Bayliss
NEW YORK, Feb 17 An outspoken research
analyst who made waves by refusing to cooperate in the U.S.
government's broad insider-trading probe was charged with
illegally supplying hedge funds with tips as part of his
The charges against the analyst, John Kinnucan of Portland,
Oregon, were announced on Friday shortly before a former
executive at flash memory chipmaker SanDisk Corp
pleaded guilty to conspiring to divulge company secrets to an
unnamed consultant. A source close to the probe, who declined to
be identified, said that consultant was Kinnucan.
Kinnucan appeared in U.S. District Court in Portland,
Oregon, on Friday afternoon wearing light blue jail clothing.
After a hearing that lasted about 20 minutes, Judge John Acosta
ordered him held in custody until another hearing on Wednesday.
Between 2008 and 2010, investigators said, Kinnucan paid
insiders with cash, trips and other benefits to get secret
information, including sales trends for Apple Inc's
Kinnucan then funneled the information to hedge fund traders
in California and New York in exchange for hundreds of thousands
of dollars, investigators said.
One person who allegedly got tips from Kinnucan was a
former portfolio manager with Dallas-based Carlson Capital, a
$6.5 billion hedge fund. Carlson issued a statement on Friday
that the manager who had worked in New York had left the firm in
March 2011 and had been there for just nine months. Carlson said
it was cooperating with the probe and that it was not a target
of the investigation.
The hedge fund did not identify the manager, but three
sources familiar with the government's investigation said that
it was Dan Grossman. Sources said Grossman had retained a
lawyer, but attempts to reach the lawyer were unsuccessful.
Grossman has not been charged with any wrongdoing.
Before joining Carlson Capital, Grossman worked at
hedge fund Level Global.
Level Global shut down last year only months after FBI
agents raided it in connection with the government's insider
trading probe. Last month Level Global co-founder Anthony
Chiasson was charged in the insider probe.
Kinnucan was arrested late on Thursday, more than
a year after he was first linked to Operation Perfect Hedge, the
federal probe into the trafficking of corporate information
among analysts, corporate executives and hedge fund traders.
The 54-year-old Kinnucan briefly became a media sensation
when he went public in 2010 with his refusal to wear an FBI wire
to cooperate with the investigation. He then sent a widely
circulated email to current and former clients of his firm,
Broadband Research, to alert them to the probe.
Prosecutors charged Kinnucan with two counts of securities
fraud and two counts of conspiracy.
He was also charged with insider trading in a civil case
filed by the U.S. Securities and Exchange Commission. Both cases
were filed in the U.S. District Court in Manhattan.
Kinnucan was expected to appear Friday afternoon in Portland
federal court. He faces up to 20 years in prison on each of the
securities fraud counts and one of the conspiracy counts, and up
to five years on the other conspiracy count.
It is unclear whether Kinnucan has hired a lawyer for his
criminal defense. Nathan Burney, a lawyer who has represented
Kinnucan previously, declined to comment on Friday.
Former SanDisk executive Don Barnetson, 37, pleaded guilty
to one count of conspiracy to commit wire fraud and securities
fraud before U.S. Magistrate Judge Gabriel Gorenstein in
"I conspired with a consultant to provide confidential
information with respect to my employer at the time, SanDisk
Corp," from a period from 2008 to 2010, he said in a staccato
Barnetson faces up to five years in prison but could get
leniency given what prosecutors called his "substantial
cooperation." Bail was set at $50,000. His lawyer Gary
Villanueva declined to comment.
Federal prosecutors alleged that Kinnucan passed on
corporate secrets as part of a consulting arrangement with at
least two unidentified hedge funds, including one in Dallas.
Investigators said he gave clients material nonpublic
information that he obtained from employees at a variety of
public technology companies, causing three of those clients to
reap roughly $1.58 million of illicit trading gains.
The companies included SanDisk, network equipment maker F5
Networks Inc and chipmaker Flextronics International
Ltd, investigators said. Flextronics and SanDisk
insiders provided information on Apple, they added.
"John Kinnucan used financial incentives, fancy meals and
other inducements to curry favor with public company insiders so
they would serve up their employers' secrets," U.S. Attorney
Preet Bharara said in a statement.
In one alleged instance, Kinnucan called clients just
minutes after learning from an F5 employee that quarterly
revenue would beat Wall Street estimates.
One California portfolio manager then supposedly bought F5
shares to cover a short position -- a bet the shares would
drop-- and avoided a $631,000 loss.
"Ty [thank you] for having me cover ffiv," the portfolio
manager later wrote Kinnucan, referring to the stock ticker,
according the government.
The F5 insider is cooperating with the government.
F5, Flextronics and SanDisk did not immediately respond to
requests for comment.
Operation Perfect Hedge, made public in October 2009, has
led to more than 60 people pleading guilty or being arrested.
Among those convicted is Galleon Group hedge fund founder Raj
Rajaratnam, now serving an 11-year prison term.
Kinnucan became something of a celebrity in the financial
world in late 2010 after telling clients and the media he was
refusing to cooperate with the government probe.
He sent an email that October to more than 50 people
associated with roughly 20 hedge funds and mutual funds that he
was a target.
Among these were Kenneth Griffin's Citadel Group, Steven A.
Cohen's SAC Capital Advisors and Dallas-based Carlson Capital.
None of the funds has been accused of wrongdoing.
"My clients are not some scummy fly-by-night hedge funds,"
Kinnucan said in a December 2010 interview.
The Kinnucan cases are U.S. v. Kinnucan, U.S. District
Court, Southern District of New York, No. 12-mag-00424; and SEC
v. Kinnucan in the same court, No. 12-01230.