Insider Trading Complaint Shines Light On Technology, Finance Relationships

Intertwined relationships between fund managers and technology executives, as outlined in criminal and civil complaints released by federal investigators thus far create a complicated maze of troubling relationships throughout finance and technology industries. The cases could shine a light on a secretive and little-known ecosystem comprised of high-flying, aggressive executives from both the technology and finance industries.

The current case centers on alleged insider trading by billionaire Raj Rajaratnam and his Galleon Group company includes separate charges against IBM Senior Vice President Robert Moffat.

Consider the case of Moffat, who had been running IBM's $5.4 billion annual hardware business but is now on a leave of absence from the Armonk, N.Y.-based company.

Moffat was part of a team at IBM that, earlier this year, pursued an acquisition of Sun Microsystems. He was so integral to IBM's potential acquisition of Sun Microsystems earlier this year that, according to the U.S. Securities and Exchange Commission, Moffat personally transmitted an acquisition offer letter to Sun on IBM's behalf.

Agents from the Federal Bureau of Investigation are accusing Moffat of taking information he gleaned while poring over Sun's financial records and sharing it with his friend, Danielle Chiesi at hedge fund New Castle Ventures, who then allegedly traded on the inside information.

For example, according to the criminal complaint against Moffat: "On or about December 19, 2008, in connection with discussions on the subject of a potential business combination, IBM and Sun entered into a confidentiality agreement."

When Moffat flew to Dallas about a month later, with eight other IBM executives, to look over Sun's finances as part of its due diligence, "Moffat contacted Chiesi at home that evening, and had several conversations with her over the next several days," according to the SEC's civil complaint, which relies on wiretapped conversations and phone records among its evidence. "In the course of one or more of these conversations, Moffat provided Chiesi with material nonpublic information concerning Sun's (second quarter) 2009 earnings."

The SEC's civil complaint seeks to bar Moffat from ever again working as an officer of a publicly traded company.

For its part, IBM has portrayed Moffat's activities as that of a sole, lone executive. A company spokesman on Monday referred to the allegations against Moffat as his "personal activities." The spokesman, asked Tuesday about IBM, Moffat and the confidentiality agreement with Sun, declined to comment.

IBM eventually walked away from an acquisition of Sun, which later agreed to be acquired by another IBM rival, Oracle. The Sun-Oracle deal has been on hold for months as European regulators weigh whether or not to give their approval. (A Sun spokeswoman did not return calls for comment on this story. Separately, Sun announced Tuesday it would eliminate 3,000 jobs at the company and blamed it largely on the delay in winning approval for the Oracle takeover.)

Confidentiality agreements are commonplace during acquisition negotiations -- and are generally entered into so publicly traded companies can share key financial information with each other as part of the due diligence process.

When read together, the SEC and FBI papers paint a portrait of a complicated and interconnected landscape of technology and finance executives with long histories, professional relationships and friendships. In another instance involving Moffat, for example: when IBM was in the middle of Advanced Micro Devices' bid to win financing from Abu Dhabi, Chiesi worked to get inside information from Moffat while Rajaratnam worked to get inside information from an unnamed AMD executive. Chiesi and Rajaratnam then traded notes, according to the complaint. Chiesi also said, separately, that she wanted to "triangulate" information from Moffat and the AMD executive.

Moffat is not the only technology executive described in legal papers. Executives from Polycom, Intel Treasury and Akamai also enter into the mix. Federal investigators allege that at least one executive at each company provided inside information to hedge fund traders. And the cast of characters may not stop there. Tuesday evening, the Boston Globe reported as many as 10 securities professionals may face arrest in the coming days as part of the investigation.

"I haven't heard anything officially and I don't know anyone involved, but there are enough [hedge funds] that I wouldn't be surprised. There has to be a few other hedge funds doing it. [Rajaratnam] couldn't be the only one," said Jeff Matthews, managing director of RAM Partners, Greenwich, Conn.

Up until the late 1990s, material information about a company's performance was routinely dished out during semi-private meetings, but the SEC adopted Regulation Fair Disclosure on Aug. 15, 2000, to curb that practice.

For the most part, "Reg FD," as it is known, has been an effective tool in creating a fair market for releasing information to the public, according to Matthews.

"I remember conferences were by invitation only. A company like Hewlett-Packard would have a conference and get asked 'How are DRAM prices?' They'd say DRAM is short and everyone would run out and buy Micron. It was the Wild West," Matthews said. "Since then, that type of investing went out of favor and was replaced by good old-fashioned fundamental analysis. What [Galleon Group] is accused of is a combination of good old fundamental analysis and crossing the line into material, non-public information."

For the most part, the prospect of being arrested and handcuffed is a pretty scary prospect for most Wall Street buyers and sellers, Matthews said.

"If you're handcuffed, you lose your business. What else do you need? If you're even thinking of approaching that line, that's going to make you think twice. If not, you're a bad guy and you're going to do it anyway," he said.

Ironically, Matthews believe the bad economy didn't put the pressure on Wall Street to cheat to make more money. Rather, it was the current recovery of the market, he said.

"Go back nine months, when everything was collapsing, if everyone's fund is doing poorly, like most hedge funds did last year, then who needs to cheat? The pressure's off you a little bit," Matthews said. "It's like being stuck in traffic with nowhere to go. But if you're stuck in the one lane not moving, which happened this year, that creates pressure. Some people have been doing well this year in their funds because they correctly bet on a rising market. Others said, 'Forget it, the market's dead,' and they got out. Now they're under enormous pressure to perform. You've got to get in the lane that's moving."