Yet Another Tech Insider Trading Scandal in New York
November 9, 2009 Timothy Prickett Morgan
The lawyers at the Department of Justice and G-men at the FBI have sure been busy in the past three weeks. Last week, yet another insider trading scandal erupted in New York. This time another 14 people, including hedge fund managers, lawyers, and an analyst at Moody’s Investor Service have been charged with participating in an insider trading ring that has allowed yet another group of people to profit to the tune of $20 million.
The initial insider trading scam, which centered around the Galleon Group and New Castle Group hedge funds, came to light when six people were arrested and charged on October 16. As The Four Hundred previously reported, Bob Moffat, formerly senior vice president and general manager of IBM‘s Systems and Technology Group, has been charged with leaking insider information about Advanced Micro Devices, IBM, and Sun Microsystems, information which Raj Rajaratnam, the founder of Galleon, and Danielle Chiesi, an employee of New Castle, used to trade stocks and, among other shares and information from other sources, allowed them to get at least $20 million in ill-gotten gains. Moffat was put on a leave of absence from IBM on October 20 and on October 30 left Big Blue. He has been replaced by Rod Adkins, who, like Moffat, was a rising star inside of IBM and potentially vying for one of the top jobs when Sam Palmisano, IBM’s president, chief executive officer, and chairman, retires.
This second case, as you can see from the complaint filed by the DOJ and the FBI centers around Zvi Goffer, a former employee of Galleon who also worked at Schottenfeld Group, a broker dealer. Between April 2007 and May 2008, Goffer and his co-consipirators are accused of using insider information to do illegal trades in 3Com, Avaya, Kronos, Axcan Pharma, and Hilton Hotels–firms that were all acquired by private equity companies during that time.
As a partner of IBM’s for its Voice Over IP (VOIP) telephony software for the i/OS platform, 3Com has an oblique connection to the platform. 3Com was acquired by Bain Capital Partners, one of the powerhouses of private equity and venture funding, in October 2007 for $2.2 billion, with a 20 percent stake being acquired by Huawei Technologies, now 3Com’s manufacturing arm.
Kronos, of course, is the former public company that did a slew of acquisitions to become the dominant workforce management software maker. In March 2007, Kronos was taken private by Hellman & Friedman Capital Partners, which shelled out $1.8 billion for the company.
According to Preet Bharara, U.S. Attorney for the Southern District of New York, in the past three weeks, 20 defendants have been charged in these loosely linked insider trading networks, and the total amount of illegal profits identified so far is more than $40 million. Five of the 20 people have pleaded guilty to the charges so far.
And cynical observers expect that more people will eventually be charged. It is very hard to believe that this sort of behavior is not rampant.