New York, NY – Last week, the Securities and Exchange Commission filed civil securities fraud charges against four consultants and two former employees of expert network, Primary Global Research, for providing non-public information about various technology companies to hedge funds and other investors. The SEC’s charges were similar to the criminal charges brought previously by federal prosecutors in Manhattan.
The SEC’s Charges
The four consultants charged by the SEC included Walter Shimoon, a senior director of business development at Flextronics; Mark Anthony Longoria, a former AMD supply-chain manager; Daniel DeVore, a former Dell global supply manager; and Winifred Jiau, an independent technology industry consultant. The two former Primary Global Research employees included Bob Nguyen, a former Primary Global analyst, and James Fleishman, a former vice president and sales manager.
Robert Khuzami, the director of the SEC’s Division of Enforcement, explained these charges by saying, “Company executives and other insiders moonlighting as consultants to hedge funds cannot blatantly peddle their company’s confidential information for personal gain. These PGR consultants and employees schemed to facilitate widespread and repeated insider trading by several hedge funds and other investment professionals.”
The SEC’s charges revealed a much more extensive investigation than has been revealed so far. According to the complaint, Mr Devore of Dell spoke with 15 Primary Global clients a month, while Walter Shimoon, participated in four to six calls a month with at least 11 hedge fund managers.
The SEC alleges that four hedge funds made or avoided losses of $5.9 mln over the course of the alleged scheme.
Other Important Topics
According to the SEC’s complaint, Primary Global Research also promised anonymity to its experts. It explained that it would not publish expert names or contact information on their website, and they informed experts they could use nicknames or pseudonyms. The complaint alleges that a PGR employee said anonymity was necessary to “protect [PGR experts] from investor relations” officials at the companies where they worked.
The SEC also highlighted the fact that PGR informed their experts that their telephone conversations would not be monitored or recorded.
In a few instances, PGR’s hedge fund clients requested to have PGR employees, Fleishman or Nguyen, to collect and pass on the material information to them, rather than have to speak directly with the relevant experts.
PGR also marketed to its clients that its experts could provide valuable information including “fast money tips”, “extreme details”, and other detailed data points. The type of material nonpublic information that the SEC alleges was provided to investors included sales data, earnings, earnings per share, performance data, corporate revenues, internal sales forecasts, purchase information, prices and volume of purchases from suppliers, new product launch, sole source information, profit margins, gross profit margins, top line quarterly revenue.
While we don’t have all the information about this case, a few of the allegations, if true could prove particularly damning. First, PGR’s alleged encouragement to its experts that their calls would not be recorded sounds like everyone knew that there might be something to hide in these conversations.
In addition, Fleischman and Nguyen’s alleged proactive collection of material nonpublic information from experts and passing this information on to clients is quite surprising.
However, equally stunning to us is that PGR allegedly told experts that they could use nicknames or pseudonyms to “protect experts from investor relations professional at the firms they worked”. This blatant desire to hide these conversations from their employers seems to suggest that something inappropriate was being discussed on these calls.
The team at Integrity Research Associates has been following the expert network industry for a number of years, and this is the first time we have ever heard that a firm went to specific lengths to keep employers from knowing that their employees were being paid to consult with investors.
As has been pointed out in many news articles, Primary Global Research published on its website that its consultants were “forbidden” to disclose nonpublic or confidential material information. However, the SEC’s complaint suggests that PGR employees went out of their way to find experts who had and would share material nonpublic information, collected this information when requested, and passed along this information to a number of their clients who were looking for this type of insider information.