Prosecutors gained another cooperating witness in their latest insider trading case against hedge fund managers. Danny Kuo, a former technology fund manager at Whittier Trust Co., pleaded guilty on Friday to to one count of conspiracy to commit securities fraud and two counts of securities fraud in a New York federal court. He has agreed to cooperate with prosecutors in their case against three former hedge fund employees, including the founder of Level Global Investors, Anthony Chiasson.
As we reported in January, seven former portfolio managers and analysts are accused of forming an insider trading ring. According to prosecutors, the insider trading ring, which included Kuo, Chiasson, former Diamondback Capital Management portfolio manager Todd Newman and former SAC Capital Advisors analyst Jon Horvath, netted over $61 million from trades of Dell stock and about $16 million from trades in Nvidia based on inside information.
Chiasson, Newman and Horvath have pleaded not guilty; the remaining four have pleaded guilty and are cooperating with prosecutors.
Prosecutors said Kuo, in one instance, received inside information, along with employees from three other hedge funds, about Dell’s financials in May and August 2008 ahead of its public earnings announcements. They also said he helped his firm avoid $78,000 in losses when the information was passed to a colleague who used it to trade Dell stock. Kuo agreed to forfeit his ill-gotten gains and will be sentenced on Oct. 15.
In November 2010, the Federal Bureau of Investigation raided the offices of four hedge funds, including Level Global and Diamondback. Three of those four hedge funds have since closed; only Diamondback is still standing.
Separately, prosecutors said they could increase the number of stocks at issue in the case against Chiasson, Newman and Horvath from two to as many as 35. Their trial is set to begin on Oct. 29.
This case does not appear to involve external research firms. However, prosecutors are clearly targeting hedge funds, which will keep compliance concerns active.