VARS: Insider Trading Scandal Could Have Far Reaching Impact

The revelation that the U.S. Attorney's Office for the Southern District of New York has charged a number of tech industry executives for their participation in a broad insider trading scheme came as no surprise to solution providers, who suspect that insider trading is not uncommon.

Federal officials on Thursday arrested four individuals for insider trading as the result of a three-year investigation into Primary Global, an expert network that allegedly offered market intelligence to hedge fund managers and analysts in exchange for cash.

Expert networks are designed to connect hedge funds and investors with corporate experts, and they exist in a number of industries. Todd Swank, vice president of marketing at system builder Nor-Tech in Burnsville, Minn., has experience with expert networks in the IT business.

"I've been part of those kinds of research companies before," Swank said. "You feel bad for people who get sucked into it, because I see how it could happen. If people work with some of these companies, there in high demand, they can make a lot of money doing that. One day you get a call asking if you'd be willing to set up a consulting session, asking all sorts of questions that you know the answers to very well. They're being taken advantage of by these research firms."

However, Swank says experts are warned in specific terms that revealing industry secrets is against the law. "Companies offer training where you'll told exactly what you are not allowed to say and do, especially at a public company," Swank said. "So they're not completely naive either. But I can see people getting into an organization, and not knowing where that fine line is."

The role that money plays in influencing the decision-making of company insiders appears to be an important factor in this case, according to solution providers.

NEXT: How Common Is Insider Trading?

"There's a lot going on behind the curtain in terms of supply chain management," said Michael Oh, president and founder of Tech Superpowers, a Boston-based Apple partner. "There's a lot of money changing hands, and it doesn't surprise me that there are deals like this going on inside seedy bars and so on. It's obviously a huge business, so it's to be expected that some collusion or insider trading happens."

Rick Russell, vice president of sales and marketing at Seattle, Wash.-based solution provider Digital Forest, wasn't surprised by this week's insider trading charges, In addition to potentially impacting the companies' stock, Russell believes the scandal could give Federal authorities cause to widen the scope of the investigation to other companies.

"The real concern is what effect this could have on the decision-making process at these companies," Russell said. "If they decide to do something underhanded in their own interest, and not in the interest of their organizations and those they partner with, it does compromise the integrity of the whole process.

However, James Huang, product marketing manager at Amax Information Technology, a Fremont, Calif.-based custom system builder, doesn't believe that insider trading is a common occurrence and sees the latest allegations as an isolated incident.

"The insider trading incident mentioned here may well be an isolated case, not a representative of the standard industry practice," said Huang. "I don’t think this incident has resulted in any unfair competition either. Therefore, it may not have much impact on the channel as a whole."

Aside from the possible negative consequences for the companies involved and their partners, Oh says the story could give pause to those companies' employees.

"It affects the overall opinion employees have for the company they work for," Oh said. "Manufacturers need to be careful because people may feel like in the long-term this isn't a great place to work. But in the short-term, unless it leads to some kind of disaster, I don't think it will have much of an effect."

On Thursday, James Fleishman, account representative for Primary Global Research; Walter Shimoon, director of business development at Flextronics; Manosha Karunatilaka, business development manager at Taiwan Semiconductor Manufacturing; and former AMD Supply Chain Manager Mark Anthony Longoria were charged with wire fraud and conspiracy to commit wire fraud.

A fifth person charged in the case, Daniel Devore, former global supply manager at Dell, was arrested earlier and pleaded guilty on December 10 to wire fraud and conspiracy to commit wire fraud and securities fraud.

The defendants allegedly earned over $400,000 in exchange for divulging their employers' trade secrets.

Prosecutors say Primary Global advertised itself as an independent team of consultants with experience in a number of industries, including telecommunications, manufacturing and technology. Their consultations allegedly earned them hundreds of dollars per hour or per call.

NEXT: Details On The Stolen Information

The information included "sales details about some of the most popular technology products, such as Apple Inc.'s iPhone, and some of the largest technology companies, such as Dell Inc," prosecutors said in the statement.

According to The Wall Street Journal investigators used wiretaps to record conversations between Longoria and Fleishman, who were heard anxiously discussing the Oct. 16 arrest of Galleon Group founder Raj Rajaratnam and others for alleged insider trading.

’Mark has been cooperating with the investigation and intends to continue to do so," an attorney for Longoria told the The Wall Street Journal Thursday. The article also says that the U.S. Attorney for the Southern District in New York is being far more aggressive than some had expected in prosecuting illicit activity on Wall Street.