Federal prosecutors alleged that a "criminal club" in the hedge-fund world made tens of millions of dollars trafficking inside information, following up on a string of early morning arrests that involved employees of SAC Capital Advisors LP and other prominent financial firms.
In an expansion of a high-profile investigation into alleged insider trading, the Federal Bureau of Investigation arrested four people in New York, Boston and California, and the government unsealed charges against three others. All were charged criminally with securities fraud and conspiracy to commit securities fraud.
Court documents described enormous profits on allegedly illegal trades—including more than $50 million in gains alone by a single hedge fund, Level Global Investors LP, on trades in shares of computer maker Dell Inc., according to the government's criminal complaint.
Investigators alleged that a ring of traders and analysts at competing financial firms swapped information, resulting in a total of $61.8 million in illicit gains. That figure rivals the amount of illegal profits in trades overseen by Raj Rajaratnam, the Galleon Group founder convicted last year and sentenced to 11 years in prison, a record for insider trading.
The complaint, filed in a New York federal court, "describes a circle of friends who essentially formed a criminal club," said Manhattan U.S. Attorney Preet Bharara. "It was a club where everyone scratched everyone else's back." Wednesday's allegations mark a new chapter in an unprecedented era of insider-trading prosecutions. Since late 2009, the government has secured 56 guilty pleas or convictions out of 63 people charged with insider trading.
Many of the previous charges involved the use of "expert-network" firms, which connect analysts and traders with public-company employees and other consultants seeking payment for information.
The latest charges allege that fund managers cut out the middlemen by developing their own sources of technology-company information rather than relying on consultants, and shared it with each other for mutual benefit.
The FBI early Wednesday arrested Jon Horvath, a technology analyst with SAC's Sigma Capital Management division in Manhattan, marking the first time criminal insider-trading charges have been brought against a current employee of Stamford, Conn.-based SAC Capital. Mr. Horvath was released on a $750,000 bond and $50,000 in cash.
"Throughout a 10-year career as a respected investment analyst, Jon Horvath has conducted himself with honesty and integrity," said his lawyer, Steven Peikin. "He has done nothing wrong, and the charges brought against him today will be shown to be meritless."
The criminal complaint alleged that Mr. Horvath shared information he received from another analyst with the Sigma portfolio manager to whom he reported, referred to in the complaint as "portfolio manager 1."
According to people familiar with the matter, that portfolio manager is Michael Steinberg, who has worked at Sigma since 1997 and is a close associate of SAC founder Steven A. Cohen. An SAC spokesman said the firm is continuing to cooperate in the investigation and declined further comment. Mr. Steinberg declined to comment through the spokesman.
As part of the wide-ranging probe, the government has been investigating whether SAC, which manages $14 billion, used inside information in trading health-care companies, among others, including trades in an account overseen by Mr. Cohen, according to people familiar with the matter. Mr. Cohen declined to comment through a spokesman.
Also Wednesday morning, Anthony Chiasson, a former hedge-fund manager at Level Global Investors, surrendered in New York, after FBI agents earlier converged on his apartment on Manhattan's Upper East Side and left empty-handed because Mr. Chiasson wasn't home.
A half dozen FBI agents in dark coats met a little after 5:30 a.m. at a Starbucks coffee shop across from Mr. Chiasson's apartment building. They talked quietly near a wall of windows. "There is a service exit," one agent said of Mr. Chiasson's building. Minutes later, they walked silently out of the shop.
About a block away, the agents put on bullet-proof vests and, just before 6 a.m., walked swiftly back down the street to the glass double doors of Mr. Chiasson's building. They entered and talked with a security guard before entering an elevator, turning back to face the lobby and heading upstairs. A few minutes later, the agents left the building, and drove off.
Mr. Chiasson, wearing a white dress shirt and slacks later in court, was released on a $2.5 million bond, secured by half that amount in cash or property.
"He's not going anywhere because he didn't do anything wrong and he wants to get an opportunity to clear his name," Mr. Chiasson's lawyer, Gregory Morvillo, told a judge Wednesday, arguing that bail wasn't needed for him to show up to face the charges.
In Boston, agents arrested Todd Newman, a former portfolio manager with hedge-fund firm Diamondback Capital Management who oversaw technology investments. A lawyer for Mr. Newman didn't return calls for comment. Diamondback's founders sent investors a letter saying the firm had been "proactively assisting" the government in its investigations, and considered Wednesday's actions "an important step towards putting this matter behind us." A spokesman for Diamondback declined to comment beyond the letter.
Mr. Newman was ordered to post a $3 million bond as bail, secured by $1 million in assets.
A few hours later, in California, agents arrested Danny Kuo, a vice president and technology-fund manager with Whittier Trust Co. in South Pasadena. Mr. Kuo couldn't be reached for comment. Whittier Trust didn't respond to a request for comment
The government also unsealed criminal charges against Spyridon "Sam" Adondakis, a former Level Global analyst who worked under Mr. Chiasson; Jesse Tortora, an ex-Diamondback analyst under Mr. Newman; and Sandeep "Sandy" Goyal, who until this month was a technology analyst at mutual-fund company Neuberger Berman Group LLC.
Prosecutors said Mr. Goyal, who worked at Dell before becoming an investment analyst, obtained nonpublic information from Dell insiders ahead of public earnings announcements, and shared it with other defendants. Dell hasn't been accused of wrongdoing.
Messrs. Goyal, Tortora and Adondakis have entered guilty pleas and are cooperating with the government in hopes of receiving lighter sentences, the government said.
A spokesman for Neuberger Berman said, "This unethical behavior is contrary to the core values of our firm and the culture of compliance in which we operate." Neuberger hasn't been accused of wrongdoing.
Mr. Bharara, the Manhattan U.S. attorney, called Level Global's alleged $53 million profit from trading in Dell shares "an enormous bet" that "wasn't much of a gamble because the game was rigged."
Dell has cooperated in the investigation, and the allegations described would be "a clear violation of Dell's policy regarding disclosure of material, nonpublic information," a Dell spokesman said Wednesday.
Mr. Chiasson, 38, was co-founder of Level Global, one of several firms the FBI raided in November 2010 after a Wall Street Journal article disclosed details of a sweeping federal insider-trading probe.
Level Global managed about $4 billion in assets at the time of the raid, but it closed last year, citing the impact of the probe.The hedge fund was a client of Primary Global Research LLP, a Mountain View, Calif. expert-network firm that arranged phone calls between public-company employees moonlighting as consultants and hedge funds interested in their companies and industries.
Several employees and consultants for that expert firm have pleaded guilty or been convicted in the probe. A Primary Global spokesman declined to comment.
The Journal reported on Nov. 30, 2011, that investigators were pursuing charges against Mr. Chiasson, among other individuals who currently or previously worked at prominent investment firms, citing people familiar with the matter.
A parallel civil complaint from the Securities and Exchange Commission filed Wednesday alleged that all seven men, along with Diamondback and Level Global, engaged in a $78 million insider-trading scheme.
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