Today, federal prosecutors and the SEC named seven fund managers and analysts as defendants in an insider trading scheme based on nonpublic information about Dell’s quarterly earnings and similar inside information regarding Nvidia Corporation. The U.S. Attorney called the trading in Dell shares the "largest insider trading scheme involving single stock charged to date." Three of the individuals pled guilty and are cooperating with the Government. The SEC’s lawsuit also named two Connecticut-based hedge fund firms as defendants.
The criminal case, which according to media reports stemmed from a four-year FBI investigation into an industry dubbed "Perfect Hedge," resulted in charges against the seven individuals, who worked at three different hedge funds and two other investment firms, for engaging in a scheme to provide material, non-public information about Dell and Nvidia. By using the information regarding Dell, the three hedge funds netted more than $60 million in illegal profits. The SEC, which is conducting its own ongoing investigation into the trading activities of hedge funds noted that, in addition to the trades of Dell shares, the insider trading gains regarding Nvidia exceeded $15 million.
The seven defendants who exchanged information regarding Dell are:
• investment analyst Sandeep ""Sandy" Goyal, who obtained Dell quarterly earnings information and other performance data from an insider at Dell before earnings announcements in 2008;
• analyst Jesse Tortora of Diamondback Capital Management LLC ("Diamondback"), who was tipped by Mr. Goyal and, in turn, tipped several others, leading to insider trades;
• Diamondback portfolio manager Todd Newman, who was tipped by Mr. Tortora and traded on the information on behalf of the Diamondback hedge funds he controlled;
• Spyridon "Sam" Adondakis, an analyst at Level Global Investors LP ("Level Global"), who was tipped by Mr. Tortora;
• Anthony Chiasson, a manager at Global Level, who was tipped by Mr. Adondakis and used the inside information to trade on behalf of Level Global hedge funds;
• Jon Horvath, a technology research analyst at another hedge fund, who was also tipped by Mr. Tortora and caused insider trades at his firm; and
• Danny Kuo, a vice-president and fund manager at an investment adviser who also was tipped by Mr. Tortora and caused his firm to execute profitable insider trades in Dell securities.
The charges allege that Mr. Kuo obtained inside information about Nvidia’s calculation of its revenues, gross profit margins, and other financial metrics in advance of the company’s earnings announcement for the first quarter of 2010, and caused his firm to trade on that information. Mr. Kuo tipped Messrs. Tortora and Adondakis, who then tipped Mr. Newman and Mr. Chiasson, respectively (which resulted in further insider trades at Diamondback and Global Level).
In the criminal case, Messrs. Goyal, Tortora and Adondakis have pled guilty to their roles in the insider trading scheme and are cooperating with the Government’s investigation. The charges against the remaining for individuals are still pending. U.S. Attorney Preet Bharara said: "The charges unsealed today allege a corrupt circle of friends who formed a criminal club whose purpose was profit and whose members regularly bartered lucrative inside information so their respective funds could illegally profit. … We have demonstrated through our prosecutions that insider trading is rampant and has its own social network, a network we intend to dismantle. We will be unrelenting in our pursuit of those who think they are above the law." Mr. Bharara’s vow has been backed up by the cases – the lengths of insider trading sentences have increased greatly in recent years, as discussed here.
The SEC’s case named all seven men as defendants, along with Diamondback and Global Level. SEC Director of Enforcement Robert Khuzami called the defendants "sophisticated players who built a corrupt network to systematically and methodically obtain and exploit illegal inside information again and again at the expense of law-abiding investors and the integrity of the markets." The SEC has touted its successes in insider trading cases, such as the $92.8 million civil penalty against the central defendant in the last large insider trading ring, Raj Rajaratnam (previously discussed here).