New Compliance Tool: Pliers


New York  –  U.S. prosecutors moved closer to their reported target, hedge fund SAC Capital, with the arrest of two portfolio managers formerly employed by SAC.  The complaint also names two additional experts employed by Primary Global Research (PGR) and refers to independent research consultants which participated in trafficking inside information.

Charges were filed yesterday against Donald Longueuil, a former portfolio manager at CR Intrinsic Investors LLC, an affiliate of SAC Capital, and Noah Freeman, a former portfolio manager in SAC Capital’s Boston office.  Freeman entered a guilty plea and has been acting as a cooperating witness for the government.

Longueuil joined CR Intrinsic Investors, LLC, in July 2008.  He was previously a managing director and communications technology analyst at Empire Capital Management, LLC.   Before that, Longueuil was an investment manager focused on media, technology, telecom, and energy at Morgan Stanley and a research analyst for Longueuil & Co working as an outsourced researcher for hedge funds and other investment professionals.   Longueuil also worked as a wireless sector analyst at The Yankee Group and as a research analyst at McCreight and Company.  He earned a Bachelor’s in Psychology from Northeastern University.

Freeman was a managing director at Sonar Capital Management LLC in Boston from March 2005 to May 2008, according to data compiled by Bloomberg.   A month after leaving Sonar, he moved to SAC Capital. Freeman also worked as a semiconductor analyst for Brookside Capital until 2004, a semiconductor analyst at Bain Capital and associate consultant at Bain and Company and received an undergraduate degree from Harvard University, according to LinkedIn, a professional networking website.

The complaint U.S. vs. Samir Barai and Donald Longueuil filed in US Southern District court in Manhattan yesterday alleges that Barai, who formerly worked at Tribeca Global Management before founding Barai Capital Management, Longueuil and Freeman regularly shared inside information they had obtained.   “These lengthy conference calls occurred as the quarterly reporting season for technology companies approached.”

Barai and Freeman maintained an exclusive relationship with Winifred Jiau, an expert provided by PGR and separately charged in December.  Jiau was part of PGR’s “private” network, meaning she was reserved to consult exclusively with Barai and Freeman, who sometimes called her together.  The complaint says that Jiau was paid $10,000 per month by PGR, but the amounts paid by Barai Capital and Sonar Capital/SAC to PGR are not disclosed.  Freeman allegedly shared information obtained from Jiau with Longueuil.

According to the complaint, Barai Capital made $820,000 in profits from a trade in Marvell stock during May, 2008 based on information obtained from Jiau.   It alleges that Empire Capital (where Longueuil was employed) made $1.08 million from its trading in Marvell stock during May 2008.

The complaint alleges that Freeman and Longueuil each had their own network of sources, going beyond experts recruited by PGR.  Freeman had sources at publicly traded companies, not all of which were recruited by PGR, and “in addition, Freeman also obtained Inside Information from independent research consultants who had obtained Inside Information from employees at public companies.”

The reference to independent research consultants may refer to Karl Motey, a former sell side technology analyst who ran his own independent research boutique, Coda Group Inc. and who has acted as a cooperating witness in charges against experts recruited by PGR.  Independent research consultants may refer to John Kinnucan of Broadband Research, who was visited by FBI agents on October 25, 2010 seeking his cooperation in wiretapping his hedge fund clients.

The complaint also refers to two additional experts recruited by PGR which allegedly passed inside information:  the “Fairchild Source”, described as a product manager at Fairchild, and the “Actel Source”, an employee in sales and distribution at Actel Corporation.  Neither are named as defendants at this point.  The number of experts affiliated with PGR that have been named in federal complaints now stands at seven.

The complaint also mentions two unnamed analysts who previously worked for Barai at Tribeca Global Management who are referred as co-conspirators.

The Wall Street Journal highlighted Longueuil’s destruction of a USB flash drive where he allegedly maintained a ‘log’ of all inside information he obtained and external hard drives where he allegedly maintained wafer data.  The complaint includes a conversation taped by Freeman during which Longueuil described the destruction: “You take two pairs of pliers, and then you rip it open…and then, it’s just a piece of NAND [flash memory storage]…So I just f—ing ripped it apart right there…I  had two external drives that had like wafer numbers on ‘em.  F—in’ pulled the external drives apart.  Destroyed the platter…Put ‘em in four separate little baggies, and then at 2 a.m…2.a.m. on a Friday night, I put this stuff inside my black North Face jacket…and leave the apartment and I go on like a twenty block walk around the city…and try to find a, a garbage truck…and threw the s—t in the back of like random garbage trucks, different garbage trucks…four different garbage trucks.”

More poignant is a BBM text conversation between Barai and Jason Pflaum, a technology analyst at Barai Capital who entered a guilty plea and was cooperating with the government.   On November 20, 2010, after Barai saw that PGR had been implicated in the investigation, he discussed the situation with Pflaum:

“*My sense is they tapped PGR just recently

*The more I think about it – just not enough clues to hold something on us

*There isn’t anything tho

*Nothing material

*We use all mosaic theory

*So we’re ok”

The complaint alleges that Barai obtained revenues, gross margins, and earnings for publicly traded companies before they were released, in addition to bookings and billings for customers which were never publicly released.   There is no question that the information would be classified as material non-public information, which is why the accused portfolio managers apparently went to great length to destroy it.   It is unfortunate for honest portfolio managers and analysts that mosaic theory is being dragged into such egregious examples of inside information.


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