This content is from: Portfolio

Insider Trading Probe Needs Some Big Scalps

We were promised some big fish would be reeled in by the government in its current investigation into insider trading. So far, none have been delivered.

The next shoe has dropped in the government’s widespread insider trading probe. And now we have learned who the recipients of the illegal insider information were.

I don’t know about you, but, I am not impressed.

Yes, three hedge fund managers and an analyst at a hedge fund have been criminally charged with conspiracy to commit securities fraud and wire fraud as well as a number of counts of securities fraud for illegally trading in the shares of several technology companies, including Marvell Technology, Advanced Micro Devices, Fairchild Semiconductor International, Cypress Semiconductor and Actel, among others.

The US Attorney for the Southern District of New York charged Samir Barai of Barai Capital Management, Barai technology analyst Jason Pflaum, Donald Longueuil of Westport, Conn.-based Empire Capital, and Noah Freeman, who worked at left Bain Capital until 2008, before moving on to a Connecticut-based hedge fund, where he left in early 2010. According to reports, that firm was Steve Cohen’s SAC Capital.

According to Bloomberg, Freeman and Longueuil are former junior portfolio managers at SAC Capital.

So, it looks like SAC is the first major hedge fund firm to be named in this insider trading scandal, which has involved a number of individuals tied to expert networking firm Primary Global.

However, we have been implicitly promised some big—no huge—fish would be reeled in by the government. But, so far few people except those within the industry have heard of any of the individuals who have been charged.

If the government really wants to send a big message to the hedge fund community, it is still going to need to nail some household names, like Raj Rajaratnam, the billionaire hedge fund manager who is at the center of a somewhat related probe.

The only thing interesting in Tuesday’s announcement are the government’s details about how the four individuals tried to cover up and destroy evidence.

For example, the US Attorney points out the individuals saved electronic records that revealed the communications between the individuals on external flash drives or external hard drives rather than on the hedge fund firms’ servers. They also used private e-mail account rather than the hedge fund e-mail account to discuss their activities.

But, this only proves the individuals are not totally stupid, just semi-dumb and totally greedy.

The government also points out that around November 19, after reading in the press that Federal investigators were looking into insider trading at their firm, Barai and Longueuil each tried to destroy digital records and documents that would have shown they had received inside information from employees at public companies and that they in turn shared this information with each other and Freeman.

For example, the government points out that on November 21, Barai told Phlaum to leave Phlaum’s laptop computer with the doorman at Phlaum’s apartment building for Barai to pick up so Barai could “encrypt it” and do a dept of defense delete, which are deletions that cannot be restored.

The complaint says Phlaum did as instructed and left his laptop with the doorman. Later that night Barai told Phlaum that he retrieved the laptop from Phlaum’s doorman and the laptop was never returned to Phlaum.

In another example, around December 20 Freeman and Longueuil discussed a USB flash drive that Longueuil maintained and contained critical incriminating evidence. According to the Complaint, Longueuil told Freeman after reading about a newspaper report about the government’s widespread insider trading probe, he “pressed the eject button and everything’s [expletive] gone.”

Longueuil then detailed how he got rid of the USB drive, including how he pulled it apart with two pairs of pliars and put them into four little baggies. Then at 2 a.m. he put it into his North Face jacket, left the apartment, walked about 20 blocks, and threw them into four different random garbage trucks.

Now, if some well-known big name hedgdies were doing all this, then we have a great story.

Hopefully, there is yet another loud shoe to drop.

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