Insider trading crackdown: US alleges scam by hedge fund managers

Insider trading: Three fund managers and an analyst are charged with an alleged insider trading scam that netted $30 million. The US crackdown on insider trading at Wall Street hedge funds was first revealed last fall.

Brendan McDermid/Reuters
Insider trading: Donald Longueuil (r.) covers his face as leaves the Manhattan Federal Courthouse with his fiancee, Tuesday. Two people, including Longueuil, who once worked for SAC Capital Advisers were charged with insider trading, drawing the $12 billion hedge fund firm further into a high-profile investigation.

Continuing a crackdown on insider trading on Wall Street, federal officials on Tuesday announced charges against three hedge fund managers and a research analyst in a scam that investigators say netted $30 million.

Samir Barai and Donald Longueuil, both former hedge fund managers, were charged on Tuesday and made initial appearances in federal court in Manhattan. They face multiple charges of insider trading and obstruction of justice.

The two others, research analyst Jason Pflaum and portfolio manager Noah Freeman, had already pled guilty to a single count of conspiracy to commit securities fraud. Officials revealed that both men had been secretly cooperating with authorities in a deal for leniency.

RELATED: Top 10 insider trading truths – a reprise

“The complaint unsealed today is a sad chronicle not only of criminal conduct but also its brazen cover-up,” US Attorney Preet Bharara said in a statement. “The lengths to which two of these defendants went to cover up their tracks sounds like something from a bad movie.”

So far, federal authorities have charged 12 individuals in a hedge fund crackdown first revealed last fall. Four have pled guilty.

“We are far from finished,” Mr. Bharara said.

According to officials, the four hedge fund executives allegedly conspired from 2006 to 2010 to obtain insider information – such as earnings statements – before the data was made public. The group allegedly obtained the information directly from employees working at the publicly traded companies or indirectly via an “independent research consultant” who obtained the information from employees and shared it.

In one example, the group allegedly obtained the quarterly revenues, gross margins, and earnings per share for Marvell Technology Group. Acting on the information before its release to the public, members of the alleged conspiracy bought Marvell stock in anticipation that the information would lead to a stock price jump.

One hedge fund purchased 300,000 shares and another purchased 800,500 shares of Marvell. After the public announcement, the share price rose 23 percent.

The trades resulted in net profits of $820,000 for one fund and $1.08 million for the other, according to federal officials.

After press reports in November revealed an ongoing grand jury investigation of hedge fund managers, Messrs. Barai and Longueuil allegedly sought to eliminate evidence of their earlier trades by destroying computer records and documents.

At one point, Barai asked for Mr. Pflaum’s laptop so Barai could “do a dept. of defense delete” and destroy all records on the machine, officials say. Pflaum never saw the laptop again.

Longueuil is alleged to have destroyed and discarded a flash drive and two external hard drives. He reportedly told Mr. Freeman that he walked around New York City at 2 a.m. and tossed the drives into random garbage trucks.

“For all their presumed sophistication, the defendants lacked a mobster’s instinct for conversational discretion,” said FBI Assistant Director-in-Charge Janice Fedarcyk.

“The complaint gives a clear picture of the cynicism that underlies the so-called ‘research’ these defendants relied upon,” she said. “When you are paying insiders for earnings data before it’s announced, that isn’t ‘research,’ that’s cheating.”

If convicted, Barai, 39, of New York, faces up to 85 years in prison and fines of up to $15.5 million or twice his gross gain from the offense.

Longueuil, 34, of New York, faces up to 25 years in prison and $5.25 million in fines or twice his gross gain from the offense.

Pflaum, 37, of New York, and Freeman, 35, of Boston, face up to 25 years in prison. Both men are expected to seek reduced sentences based on their cooperation with investigators.

RELATED: Top 10 insider trading truths – a reprise

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