IBM's Server GM Caught in Insider Trading Net

Published: October 19, 2009

by Timothy Prickett Morgan

You can really tell who hasn't watched The Wire. You just can't use communication technology if you want to get away with a crime, and you really can't trust anyone. The problem is, technology becomes invisible, and sometimes people forget they are using it. This is one of the reasons why Bob Moffat, senior vice president and general manager of IBM's Systems and Technology Group, has been caught up in a stunning insider trading scandal centered around one hedge fund and another equity fund. He was implicated through the use of wiretaps as part of an FBI investigation.

Moffat was implicated in wiretaps on the phones of Raj Rajaratnam, the managing director of a hedge fund he helped found called Galleon Management, and Danielle Chiesi, an employee of New Castle, an equity firm that used to be part of the Bear Sterns investment bank (before it was taken over by JPMorgan Chase during the economic meltdown last fall).

Chiesi is alleged to have used information culled from Moffat's inside knowledge of the impending spinoff of AMD's foundry business (which was announced last year and which Moffat knew about because IBM is a chip fab partner with AMD) as well as his insider knowledge of IBM's quarterly results at the end of 2008 and in early 2009. She is also accused of having done insider trades in Sun Microsystem's stock in early 2009, when IBM was doing due diligence as part of its acquisition talks with Sun and when Moffat was privy to the inside data.

All told, the Federal Bureau of Investigation and the U.S. Attorneys Office in Manhattan reckon that the insider trading scheme allowed Rajaratnam, Chiesi and a number of other co-defendants and the funds that they work for to have reaped in excess of $20 million on the insider trades. Moffat has not been accused of executing any insider trades or otherwise profiting from the information, which makes you wonder why he was saying anything at all.

Also named in the two suits were Anil Kumar, a director at consultancy McKinsey & Co (who was working on the AMD spinoff), and Rajiv Goel, of Intel (who presumably gave out information on Intel's Clearwire investments). One of Chiesi's co-workers at New Castle, Mark Kurland, was also charged in the same complaint along with Chiesi and Moffat. All six were arrested either on Thursday or Friday and were in court late Friday, according to various reports in the press. There is an unnamed confidential witness who has been working with the FBI during the early stages of the investigation, and it looks that that initial investigation led the Feds to Chiesi, who was trading information with Rajaratnam on various tech companies, and the FBI was able to wiretap Chiesi's calls and that led them to conclude that Moffat was a source for insider information on trades that Chiesi and Rajaratnam did on AMD and that Chiesi did with Sun and IBM stock.

Here is the creepiest exchange between Rajaratnam and Chiesi in one of the lawsuits (the punctuation is that of the FBI, not mine):

Chiesi and Rajaratnam discussed whether Moffat could potentially move from IBM to a different technology company. Rajaratnam said, "Put him in some company where we can trade well." Chiesi replied, "I know, I know. I'm thinking that, too. Or just keep him at IBM, you know, because this guy is giving me more information . . . . I'd like to keep him at IBM right now because that's a very powerful place for him. For us, too." Rajaratnam replied, "Only if he becomes CEO." Chiesi replied, "Well, not really. I mean, come on. . . you know, we nailed it."

So, the equity firms are the kingmakers, eh? It is interesting to contemplate just how much of this stuff might be going on out there in the corporate market and how much it explains who ends up where, and why.

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