U.S. authorities arrested a New Jersey man who specialized in connecting hedge funds with company executives, accusing him of revealing confidential information in the first charges to emerge from a sprawling investigation into illegal insider trading.
The arrest will send a shudder through the financial industry, which is already on edge following the raids of three hedge funds this week and the news that four other investment firms have received subpoenas seeking information in the probe. Further charges are expected as the investigation moves into high gear.
Early Wednesday, authorities arrested Don Ching Trang Chu at his home, days before he was scheduled to travel to Taiwan. In a criminal complaint filed in New York court, authorities alleged that Mr. Chu conspired to leak inside information from several technology companies, including Canada's Sierra Wireless Inc., to hedge funds.
Mr. Chu, 56, works for Primary Global Research, a so-called "expert network" company headquartered in California. For a fee, such firms connect investors, either on the phone or in person, with industry experts. Many such experts are current or former executives at publicly traded companies.
Expert networks are marketed as a way to help investors get a fuller picture of a company's business and strategies; they're not supposed to act as a conduit for confidential information. In this case, authorities claim that Mr. Chu, among other things, arranged for a hedge fund manager to receive earnings figures before those numbers were publicly disclosed. No allegations have been proven and Mr. Chu's lawyer, James DeVita, said only: "We will have an opportunity to present a defence and we'll pursue that," according to The Associated Press.
More charges are likely to follow in the coming days and weeks. "This is not the first of several, this is the first of many," says Jacob Frenkel, a partner at law firm Shulman Rogers and a former federal prosecutor. "The investigation with respect to Mr. Chu may be finished but the broader investigation is barrelling forward."
Thursday's charges confirm that U.S. authorities are employing increasingly aggressive tactics in their pursuit of insider trading and seeking out new frontiers in such illegal activity. One source of information against Mr. Chu came from wiretaps, which, until recently, tended to be reserved for cases involving organized crime or drug trafficking.
The charges against Mr. Chu also point to a shift in the types of behaviour under scrutiny. Many high-profile insider-trading cases, such as one against magazine magnate Martha Stewart in 2003, focused on single instances of alleged illegal behaviour. Lately, however, authorities are turning their attention to webs of information-sharing where tips are repeatedly passed between investors, executives and others.
Mr. Chu was involved in one such net, authorities allege. In late 2008, Mr. Chu's firm, Primary Global, struck up a relationship with a hedge fund run by Richard Choo-Beng Lee. Mr. Lee pleaded guilty to insider-trading charges as part of a different probe and has been co-operating with investigators in the hopes of receiving a shorter sentence. From 1999 to 2004, Mr. Lee worked at SAC Capital Advisors, one of the world's most successful hedge funds, founded by Steven Cohen.
In the summer of 2009, authorities say, Mr. Chu provided Mr. Lee with confidential earnings information about Atheros Communications, Inc., a semiconductor firm, before the figures were made public. He also allegedly arranged for Mr. Lee to speak with an employee at a technology company who provided figures for revenues, gross margin and sales for different product lines hours before such information was due to be released.
Later, in a conversation with Mr. Lee, Mr. Chu explained that "some guys are willing to talk [about earnings figures], some are not." He went on to say he didn't want to be too involved in the U.S. "Let me tell you the truth," Mr. Chu said. "It's dangerous" because the Securities and Exchange Commission is "too strong. In Asia, the SEC can't do too much there."
Mr. Chu also offered to connect Mr. Lee with employees at Sierra Wireless and Broadcom Corp. who were known to provide revenue numbers and other figures to hedge funds. In a statement, Sierra Wireless said the employee referred to in the complaint is not a director or officer of the company, adding it "takes these allegations very seriously and intends to co-operate fully."
The allegations against Mr. Chu will cast a harsh light on the broad field of expert-network firms. Such firms can earn tens of thousands of dollars a year from their clients, which include hedge funds and other investment managers, in exchange for access to their "experts." The experts, meanwhile, often earn several hundred dollars per hour or per call. One of the experts mentioned in the case against Mr. Chu earned more than $200,000 (U.S.) over roughly two years for his consultation services.
Mr. Chu faces two criminal charges, one of conspiracy to commit securities fraud and one of conspiracy to commit wire fraud. If found guilty, he could face years in prison and be forced to pay hundreds of thousands of dollars in fines. Mr. Chu appeared in court on Wednesday and was released on a $1-million bond.