Federal prosecutors in Manhattan broadened their insider trading crackdown on Thursday, arresting four people on charges alleging that so-called “expert consultants” revealed secrets about Apple Inc’s iPhone and other technology products to hedge funds seeking a trading edge on quarterly earnings reports.
The latest probe targeted Primary Global Research (PGR), a California-based firm that offered consulting services to investors on industry trends, issues and regulations. Instead, prosecutors allege, firm executive James Fleishman used four consultants employed by publicly traded companies to create a corrupt clearinghouse for confidential information.
Fleishman, 41, was charged with wire fraud and conspiracy. Three others, all outside “expert consultants” for Primary Global Research until earlier this year, were charged with wire fraud and conspiracy to commit securities fraud and wire fraud, according to papers filed in federal court in Manhattan.
Fleishman helped arrange for Primary Global Research clients, including hedge funds, to speak with the consultants, the papers said. The clients were told about highly confidential Apple sales forecasts information, new product features for the iPhone and a top-secret project known internally at Apple as “K48,” which became the iPad, launched this year, the complaint said.
The charges allege that a “corrupt network of insiders at some of the world’s leading technology companies served as so-called ‘consultants’ who sold out their employers by stealing and then peddling their valuable inside information,” US Attorney Preet Bharara said in a statement.
The allegations describe criminal conduct that went “well beyond any legitimate information-sharing or good faith business practice,” he said.
Primary Global Research paid four consultants more than US$400,000 merely to participate in phone calls with their clients, “an indication of the value placed on the information,” FBI Assistant Director Janice K. Fedarcyk said.
“This wasn’t market research. What the defendants did was purchase and sell insider information,” Fedarcyk said, adding: “Our investigation is most assuredly continuing.”
The three consultants charged were Mark Anthony Longoria, 44; Walter Shimoon, 39; and Manosha Karunatilaka, 37.
Longoria worked at Advanced Micro Devices Inc as a supply chain manager, Shimoon worked at Flextronics International Limited as senior director of business development and Karunatilaka worked as an account manager at Taiwan Semiconductor Manufacturing Co’s (TSMC, 台積電) office in Burlington, Massachusetts.
The complaint said Shimoon illegally provided information about sales forecasts and new product features for Apple’s iPhone that had been given to employees of Flextronics, which worked with Apple on camera and charger components for the iPhone and iPod.
It said he also spoke of the iPad project, saying in secretly recorded conversations with a government cooperating witness: “At Apple you can get fired for saying K48 ... outside of a meeting that doesn’t have K48 people in it. That’s how crazy they are about it.”
The complaint said Shimoon was also captured on wiretaps promising to get secrets about sales at Research In Motion Ltd, which makes Blackberrys.
Shimoon has been terminated and Flextronics has clear policies prohibiting the release of confidential information about the company and its business partners, Flextronics said in a statement.
For Karunatilaka, bail was set at US$250,000 after an initial appearance in federal court in Boston. He was expected to be released on Thursday. His lawyer, Brad Bailey, said he was reviewing the allegations against his client and would decide how to proceed.
TSMC said yesterday the company fired Karunatilaka for violating company policies.
“We fired him yesterday because he violated several company policies,” said Elizabeth Sun (孫又文), director of TSMC’s corporate communications division.
“TSMC has cooperated fully with the Department of Justice and will continue to do so,” Sun said.
Longoria appeared before US Magistrate Judge Andrew W. Austin, who ordered him released on a US$50,000 unsecured bond and told him to surrender his expired passport.
Longoria resigned Oct. 22 from AMD, where he had worked since 2007, said Mike Silverman, a company spokesman.
“It appears that AMD is the victim of an insider trading scheme,” Silverman said. He added that AMD was cooperating with investigators.
Lawyers for Fleishman did not return phone calls for comment.
additional reporting by Reuters