MANHATTAN (CN) – In what a U.S. attorney called a “wake-up call to Wall Street,” 14 people have been charged with making $40 million from insider trading. Prosecutors say federal investigators who unraveled the wide-flung network used “methods traditionally reserved for the mob and narcotics traffickers.”
The SEC says the scheme involved insiders at IBM, Intel, McKinsey & Co. and other major corporations revealing the secrets of at least 12 companies, including Hilton, Google, Avaya, 3Com, Axcan and Kronos.
According to the indictments, unveiled in a press conference Thursday afternoon, insiders used drug kingpins’ methods to carry out the conspiracy: communicating through disposable cell phones and giving contacts nicknames such as “the goose” and “the Octopussy.”
“When sophisticated businesspeople begin to adopt the methods of common criminals, we have no choice but to treat them as such,” U.S. Attorney Preet Bharara said in a statement.
The U.S. Attorney’s Office said 20 people were arrested; 14 are named in federal complaints; five already have pleaded guilty.
Prosecutors say the conspiracy revolved around multibillion-dollar hedge fund Galleon Management and its 52-year-old founder, Raj Rajaratnam.
The SEC says Rajaratnam hatched the scheme in late 2005, when his former colleague Roomy Khan was looking for work.
Rajaratnam allegedly offered her a job on the condition that she give him inside information about a public company. Prosecutors say Khan satisfied his demand by giving him the earnings of the networking software provider Polycom.
Rajaratnam allegedly bought 245,000 shares of Polycom based on Khan’s first tip and made about $600,000. Khan then allegedly tipped him off about Hilton (leading to $4 million in profits), Google ($9 million) and Kronos ($900,000).
Though Rajaratnam maintains his innocence, Khan has pleaded guilty. One of her contacts, Schottenfeld Group trader Gautham Shankar, also pleaded guilty.
The SEC says Shankar’s colleague, Zvi Goffer, was known as “the Octopussy” because he had his tentacles in many inside sources. He allegedly gave one of his tippees a disposable cell phone with two numbers programmed into it – labeled “you” and “me” – before an acquisition was announced.
“After the announcement, Goffer destroyed the disposable cell phone by removing the SIM card, biting it, and breaking the phone in half, throwing away half of the phone and instructing his tippee to dispose of the other half,” the SEC says.
Two hedge funds allegedly made $10 million from Goffer’s tips.
Octopussy is not the only memorable nickname in the complaint. Two unidentified insiders are referred to as “the goose” (who allegedly laid the golden egg) and Tipper X.
In addition to Khan and Shankar, three others have pleaded guilty: Steven Fortuna, a former managing director of Boston hedge fund S2 Capital; Ali Far, founder of the hedge fund Spherix Capital; and Richard Choo-Beng Lee, former Spherix President.
Other defendants include McKinsey director Anil Kumar, New Castle portfolio manager Danielle Chiesi, New Castle managing director Mark Kurland, IBM executive Robert Moffat, Moody’s analyst Deep Shah, Spherix portfolio managers Ali Far and Choo-Beng Lee, Atheros vice president Ali Hariri, G-2 Trading representative David Plate, and Fortuna co-founder Steven Fortuna.
Along with Galleon, the corporate defendants are S2 Capital, Far & Lee LLC, New Castle Funds LLC, and Management LP.
Bharara said the investigation is continuing, and that the SEC intends to use the same aggressive methods used in this sting.
“Is this just the tip of the iceberg? We don’t have an answer yet,” he said. “But we aim to find out.”
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