April 17, 2024

DealBook: Ex-SAC Capital Trader Aided Insider Inquiry

Federal District Court in Lower Manhattan.Craig Ruttle/Associated PressFederal District Court in Manhattan.

A former portfolio manager at the hedge fund SAC Capital Advisors testified in federal court on Friday that he had provided investigators with the names of more than a dozen individuals when he confessed to insider trading.

Noah Freeman, the former portfolio manager, told a jury that he sat down with law-enforcement officials at the end of last year and told them about crimes that he and others had committed.

“How many people did you tell the government about?” asked Avi Weitzman, a federal prosecutor.

“At least, in passing, more than a dozen,” responded Mr. Freeman, 35, a tall, athletic-looking Harvard College graduate. He did not identify whom he had discussed with the government.

He did tell the jury that trading on illegal stock tips at Sonar Capital, the hedge fund he worked at before joining SAC, was part of Sonar’s business model.

Mr. Freeman took the witness stand in Federal District Court in Manhattan in the trial of Winifred Jiau, a former consultant at a so-called expert network firm, which connect money managers with industry experts, including public company employees, for a fee.

Federal prosecutors have charged Ms. Jiau with knowingly facilitating the passing of secret information about technology businesses to hedge fund traders.

One of those traders was Mr. Freeman, a main government witness in its case against Ms. Jiau.

His testimony came about six months after two F.B.I. agents stopped him in the parking lot of the Winsor School, an elite private school in Boston, and played a tape recording of him, Ms. Jiau and another hedge fund manager exchanging confidential information.

Mr. Freeman left SAC in January 2010, and the hedge fund industry altogether, and was teaching an advanced economics course at the school. He no longer teaches there.

Mr. Freeman, who has pleaded guilty, faces up to 25 years in prison. But by helping the government gather evidence, he hopes to obtain a lesser sentence. Mr. Freeman’s cooperation helped federal prosecutors bring criminal charges against not only Ms. Jiau, but also three other hedge fund employees who were part of Mr. Freeman’s insider trading ring. The hedge fund employees — Donald Longueuil, formerly of SAC Capital; Samir Barai of Barai Capital Management; and Jason Pflaum, a colleague of Mr. Barai — have all pleaded guilty. Dressed in a dark suit, white shirt and red Hermès tie, Mr. Freeman spent only a little more than an hour on the witness stand before Judge Jed S. Rakoff dismissed the jury until Monday.

In that short time, he laid out for the jury his 10-year career. After a stint as a consultant at Bain Company, he said he joined Brookside Capital, the hedge fund arm of Bain Capital Partners, the Boston private equity firm. From there he moved to Sonar Capital, also a Boston hedge fund, where he said he spent three-and-a-half years.

Mr. Freeman said that he had no trading authority at Sonar but worked as an analyst gathering research and providing investment ideas to Neil Druker, the head of the fund. He said that trading on inside information at Sonar “was regularly employed as part of our business model.”

Neither Sonar nor Mr. Druker has not been charged with any wrongdoing. Mark Hyland, a lawyer for Sonar, said: “Freeman turned out to be a rogue, dishonest employee who acted without authority and deceived Sonar Capital. Freeman now continues his pattern of deception by falsely seeking to implicate others at Sonar in the hopes of obtaining a lighter sentence for his own criminal acts.”

It was at Sonar that Mr. Freeman said he had met Ms. Jiau. He testified that Ms. Jiau had provided him with the “complete financials” for the technology companies Marvell Technology Group and Nvidia, before they were publicly announced. The information, he said, was “extremely” helpful.

He left Sonar in early 2008 to start the Boston office for SAC, the giant Stamford, Conn.-based hedge fund run by the billionaire investor Steven A. Cohen. Mr. Freeman said that at SAC he had day-to-day trading authority and at his peak oversaw about $300 million of the fund’s money.

His testimony about his work at SAC was cut short when the trial broke for the day.

SAC has not been charged. A spokesman for the firm previously said Mr. Cohen had been “outraged” by Mr. Freeman and Mr. Longueil’s conduct.

To defuse a potential line of questioning on cross-examination, Mr. Weitzman, the prosecutor, asked Mr. Freeman about his past drug use.

He said he had smoked marijuana regularly for 10 years but stopped in late 2008. He also conceded using mushrooms once, in spring 2009.

“Only once,” he reiterated. “It was a terrible experience.”

Article source: http://feeds.nytimes.com/click.phdo?i=2e14d208d360704d98b14ff36bb7e770

DealBook: Next Up, a Crackdown on Outside-Expert Firms

Manosha Karunatilaka pleaded guilty to insider trading, admitting that he leaked details about his company’s sales to clients of an expert network firm.Peter Foley/Bloomberg NewsManosha Karunatilaka admitted that he leaked details about his company to clients of an expert network firm.

With the government securing a conviction against Raj Rajaratnam of the Galleon Group on Wednesday, federal prosecutors will shift their focus to expert networks — the intricate web of money managers, corporate executives and consultants at the center of another wave of insider trading cases.

Over the last few years, the Justice Department has built dozens of insider trading cases. The government’s effort has sent shivers through the hedge fund industry, the influential investors that have figured prominently in an investigation into Wall Street.

Prosecutions have developed mainly along two tracks. One group of cases aimed at Mr. Rajaratnam, the founder of Galleon, and the cadre of corporate insiders and investment traders from whom he solicited confidential information. The other group has involved expert network firms, the Wall Street matchmakers who connect large investors with outside experts.

In several indictments involving expert networks, authorities claim that hedge fund managers paid outside consultants handsome fees for providing nonpublic information. The government has also charged executives at the expert network firms, the ones who brokered the connections, with knowingly facilitating the exchange of illegal stock tips.

Prosecutors say the money managers often sought impending information on large technology companies, like Apple and Dell, whose stocks can turn quickly on tidbits about financial performance and forthcoming products. On Wednesday, a former account manager at the Taiwan Semiconductor Manufacturing Company, Manosha Karunatilaka, pleaded guilty to insider trading, admitting that he leaked details about the company’s sales and shipping orders to clients of Primary Global Research, an expert network firm.

“The cases send a good signal that firms need to remain vigilant,” said Carlo V. di Florio, the Securities and Exchange Commission’s director of compliance.

The insider trading investigation has had a chilling effect on the expert network industry, which is struggling to maintain its Wall Street client base. Scared of being ensnared by scandal, large financial firms are reducing their use of expert networks and reviewing their internal policies regarding outside consultants. In the last year, revenue at these firms dropped 20 to 30 percent, according to Integrity Research, which tracks the industry.

“Managers are studying those complaints carefully and saying, ‘O.K., what can we do to make sure that we’re not doing anything like this?’” said Marc E. Elovitz, a lawyer at Schulte Roth Zabel, which represents some of the country’s largest asset management firms. “With the increased attention to it, there’s been some more selectivity in the use of these services.”

The expert network industry developed after the S.E.C. enacted the Regulation Fair Disclosure rule in 2000. The rule, which bans public companies from disclosing “material nonpublic information to certain individuals or entities,” makes it illegal for corporate executives to share information only with certain parties. Lacking that exclusive pipeline, some big investors began relying on expert networks to supplement traditional sources of research.

Now, Wall Street is distancing itself from the industry. The hedge funds Balyasny Asset Management, Millenium Partners and Och-Ziff Capital Management have suspended their use of such consultants, according to people close to the firms who were not authorized to speak publicly on the matter.

Other firms are adjusting their rules. Credit Suisse has restricted the use of expert networks to certain departments. Morgan Stanley is hammering out a firmwide policy that will effectively limit their use, according to one person with knowledge of the situation who was not authorized to speak publicly.

Some hedge funds are barring the use of consultants who work at publicly traded companies, while others are encouraging compliance officials to randomly monitor phone conversations.

Federal authorities have tried to quell the anxiety by drawing a distinction between the legitimate players and the bad actors. In March, Preet S. Bharara, the United States attorney in Manhattan, said that there was “nothing inherently wrong or bad about hedge funds or expert networking firms or aggressive market research, for that matter.”

Such statements have provided little reassurance. Many financial firms that are still using expert networks have moved their business to the largest outfits with the most established compliance practices

“If this little industry is to survive, it’s going to have to glow with virtue, which means a lot of self-regulation,” said Robert Weisberg, a professor of criminal law at Stanford.

But comprehensive systems to vet consultants, train employees and maintain sprawling databases requires significant capital and human resources. The Gerson Lehrman Group, the industry’s largest player with a roughly 60 percent share, employs a full-time compliance staff of about 20 people.

Compliance is a heavy burden for the smaller players. There are only about 40 expert network firms in the United States, according to Integrity Research, and only a handful have annual revenue in excess of $40 million. Given the costs associated with compliance, Professor Weisberg predicts that many smaller firms will have to team up with their larger brethren or shut down.

Mr. di Florio said the S.E.C. was paying greater attention to compliance by expert networks. “Firms recognize that regulators, like the S.E.C., have their radar up on these insider-trading practices, and we’re looking to see that they have effective regulatory compliance and risk management programs in place,” Mr. di Florio said.

Several states, using powers under the Dodd-Frank law to police hedge funds, are starting to outline new rules to govern the industry.

Earlier this month, William F. Galvin, the chief financial regulator in Massachusetts, proposed regulations to force investment advisers to obtain certification from expert network consultants that they will not provide any confidential information.

“I hope this leads to more sensitivity in the industry that they cannot simply purchase insider information,” said Mr. Galvin said. “We are going to be as aggressive as we can.”

Azam Ahmed contributed reporting.

Correction: An earlier version of this post incorrectly spelled the name of law firm Schulte Roth Zabel.

Article source: http://feeds.nytimes.com/click.phdo?i=2fb017ab870d1eb2dd44a374d0a31e43