Insider Probe Shifting Gears


New York – Arrests in the insider trading case will resume shortly, possibly this week, according to sources ‘familiar with the matter’ speaking to the Wall Street Journal.  The investigation is expected to enter a new phase, with the focus of arrests shifting from expert networks to hedge funds.

So far the scorecard is 7 arrests: two former employees of California-based Primary Global Research and five experts affiliated with Primary Global.  (Click here for description of those arrested.)  The arrest complaints show another 5 cooperating witnesses, including Richard Choo-Beng Lee, a former Galleon Group trader who plead guilty in 2009; Karl Motey, a former sell-side analyst who set up his own boutique, Coda Group, Inc; and Daniel DeVore, a former global supply manager at Dell who was an expert offered through Primary Global.  The two other unnamed witnesses, who have plead guilty to insider trading, include a former analyst with a hedge fund in NY and another former employee of Primary Global, who was the ‘vertical manager’ for semiconductors.

The initial arrests were the hors d’oeuvres, now we move to the main course.  It has been clear from the outset that the primary target of the investigations has been hedge funds.  The initial stages of the investigation where to cast a wide net of subpoenas (for a list of publicly announced subpoenas, click here).  Experts who consult for expert networks represent an ideal vehicle for prosecutors because they speak to multiple contacts at multiple firms.  For this reason, non-hedge funds such as Wellington Management, Janus Capital, J&W Seligman and Credit Suisse were caught up in the subpoenas.

Most of the experts named so far in the investigation worked through Primary Global. The latest arrest, Winifred Jiau, apparently also worked through Vista Research and Guidepoint Global (which acquired Vista in May 2009).  The WSJ also reported that an expert affiliated with Gerson Lehrman Group was being investigated, but nothing has materialized supporting this allegation.

The WSJ also 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 have been charged.

The new phase of the investigation indicates that we are moving into the middle stages of the investigation.  However, this does not mean that we are anywhere close to the end.  We speculate that one motivation for prosecutors to cast a wide net is to build charges at an enterprise level, not just at the individual level.  In a speech last October to the New York Bar, Preet Bharara stressed his emphasis on bring down firms rather than individuals: “I am in the habit of asking AUSAs [assistant US attorneys] in appropriate cases whether they have considered charging the corporation when we are contemplating charges against individuals.”  Ideally, prosecutors would like to bring down hedge funds, not just individuals.

For this reason, expect this investigation to continue well into 2011.  Unless there is an external event such as a terrorist attack requiring Bharara to reassign manpower, the insider investigation remains his signature statement.  The collapse of Drexel Burnham in the ‘80s gave us Rudi Giuliani, the dot com collapse in 2000 gave us Eliot Spitzer, and, for better or worse, the recent financial crisis has now given us Preet Bharara.


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