Hedge Fund Implicated in Insider Trading Probe

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New York – A former Citigroup Inc. hedge-fund manager was named by the Wall Street Journal yesterday as a co-conspirator in the insider trading case, confirming that the investigation is entering a new phase, shifting focus from expert networks to hedge funds.  Samir Barai was the 39-year-old founder of New York-based Barai Capital Management, an $80 million hedge fund.  Prosecutors haven’t disclosed any charges of wrongdoing against Barai in the still-unfolding investigation.

The WSJ cited sources “familiar with the matter” in naming Barai as the co-conspirator referred to as “CC-1” in the complaint against Winifred Jiau, an expert affiliated with Primary Global Research.  The Jiau complaint described CC-1 as the founder and principal portfolio manager at “Hedge Fund A”, located in New York, New York.

Based on these revelations, Barai Capital is the mystery fourth hedge fund raided in November, about ten days before the FBI raided Diamondback Capital Management, Level Global and Loch Capital Management.  In the criminal complaint filed against Jiau, FBI agent B.J. Kang noted a federal judge had signed a search warrant “on or about November 12, 2010” to seize some computers and tape recording devices at “hedge fund A,” which now turns out to have been Barai Capital.

The WSJ’s sources also identified Jason Pflaum, a 38-year-old technology analyst at Barai Capital, as a cooperating witness, “CW-1” in the complaint.  CW-1 is described as a research analyst at Hedge Fund A who entered a guilty plea pursuant to a cooperation agreement with the Government to charges of conspiracy and securities fraud.

An investor in Barai Capital Management told clients that Barai says it is cooperating with a government insider-trading probe and has started to wind down its hedge funds.  “BCM has informed us that they are cooperating fully with the government’s investigation,” says the letter to clients of Protégé Partners, a New York investment firm that focuses on providing seed money to small hedge funds.

Still unidentified is “CC-2” in the Jiau complaint, who is described as a portfolio manager who worked at two separate hedge funds, “Hedge Fund B” and “Hedge Fund C”.  It is possible that CC-2 previously worked at one or two of the three hedge funds raided in November.  We are aware of six hedge funds receiving subpoenas related to the investigation.

Also still unidentified is “CW-5” of the complaint against Fleishman, Shimoon, Longoria and Karunatilaka.  CW-5 is described as an analyst for a hedge fund located in New York, New York.

The WSJ previously revealed the names of two former employees of Diamondback Capital Management which are allegedly the focus of investigation, Todd Newman, who was a technology-focused portfolio manager before leaving the firm early last year, and Jesse Tortora, an analyst who worked for Newman.  Neither has been charged, but one possibility is that Newman is CC-2 and Tortora is CW-5.

Prosecutors seem to be parceling out crumbs to maintain media interest in the trading investigation.  Newman and Tortora were leaked to the WSJ on January 9th with a promise that arrests would resume shortly, possibly that week.  That promise was not fulfilled, so Barai’s name was leaked three weeks later.

Barai is no Steve Cohen.  Given the hype that prosecutors have created around the investigation, they are clearly targeting bigger fish than Barai.  It appears, however, that hooking those fish is taking longer than they anticipated.

Here is the “Who’s Who” of the investigation so far:

Employees of Primary Global Research (PGR):

Don Ching Trang Chu, who had worked as a Taiwan liaison at PGR, was arrested on November 24th, 2010 and accused of passing inside information on Atheros Communications Inc. (ATHR), Broadcom Corporation (BRCM) and Sierra Wireless Inc. (SWIR), in addition to the unnamed tech company thought to be AMD.

James Fleishman was a salesperson for PGR arrested December 16, 2010 on charges that he arranged for hedge funds to speak to consultants, knowing the consultants would provide inside information to the funds.

Bob Nguyen, a former semiconductor vertical analyst at PGR, pleaded guilty on January 12th, 2011 to providing inside information to PGR clients.  Among other things, Nguyen was accused of obtaining confidential Dell pricing information and information on Dell’s utilization of Western Digital and Seagate hard drives from Daniel DeVore and passing these to selected clients in emails titled “Handle With Care.”    Nguyen was cited as a cooperating witness, “CW-4,” in the complaint against Fleishman, et al.

Clients of PGR:

Richard Choo-Beng Lee pleaded guilty in 2009 in the insider-trading prosecution of Galleon Group hedge fund founder Raj Rajaratnam and 22 other traders.  Lee, who once worked for hedge fund SAC Capital, became a client of PGR in late 2008 or early 2009 according to the complaint against Chu.  Lee was a witness against Chu and Longoria.

Karl Motey, a former sell side technology analyst who ran his own independent research boutique, Coda Group Inc., signed up as a PGR client at the request of the Government, and made over 60 calls seeking incriminating evidence.  Motey was apparently fingered by one of his hedge fund clients (unnamed), who is cooperating with the Government.  Motey, who is identified as CW-2 in the complaint against Fleishman et al., provided evidence against Fleishman, Nguyen, Longoria, Shimoon and Karunatilaka.

Samir Barai, founder of New York-based Barai Capital Management, which reportedly ran less than $100 million in assets as of last fall.  Barai has been named as a co-conspirator (CC-1) in the Jiau complaint, allegedly receiving inside information about Marvell and NVDIA from Jiau.

Jason Pflaum, a technology analyst at Barai Capital, has been named as a cooperating witness, “CW-1” in the Jiau complaint, and has entered a guilty plea, allegedly obtaining inside information about Marvell and NVDIA from Jiau.

Experts Affiliated with PGR:

Mark Anthony “Tony” Longoria, a Round Rock, Texas-based supply chain manager for Advanced Micro Devices Inc., was arrested in December 16, 2010 and accused of providing confidential details about AMD revenue and sales.  The complaint alleges that Longoria was paid $200,000 by PGR for consultations occurring between January 2008 and March 2010.

Walter Shimoon, a senior director of business development at Flextronics International, was arrested December 16, 2010 and is accused of providing confidential information about Flextronics and Apple Inc.  The complaint alleges that he was paid $22,000 for consultations occurring between January 2008 and June of 2010.

Manosha Karunatilaka, a manager at Taiwan Semiconductor Manufacturing Company North America in Burlington, Mass., was arrested December 16, 2010 and is accused of providing bookings information about clients of Taiwan Semiconductor.  He reportedly earned about $35,000 between January 2009 and June 2010.

Daniel DeVore, a global supply manager at Dell Computer, pleaded guilty on December 10, 2010 and acted as a cooperating witness (CW-3) and providing evidence against Fleishman and Nguyen.  DeVore allegedly received $145,740 for consultations.

Winifred Jiau, a contractor employed by NVDIA, was arrested on December 29, 2010 and is accused of providing inside information about computer chipmakers Marvell Technology Group Ltd. and Nvidia Corp.  Jiau allegedly made $200,000 between September 2006 and November 2008 through consultations arranged by PGR.

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