Two years ago, Raj Rajaratnam, the billionaire manager of the Galleon Group hedge fund, was convicted on 14 counts of insider trading. It was the largest hedge-fund insider trading case in history. But that was just the highest profile part of a broad push by the Department of Justice and the Securities & Exchange Commission to crack down on insider trading. It's an investigation that has an interesting backstory that has not received much attention: much of that insider trading happened in the tech industry. And it's a story that is far from over.
In the latest chapter, David Riley, former CIO of Foundry Networks, was arrested and charged in March with conspiracy and securities fraud for allegedly passing non-public material information to a hedge-fund manager right before Foundry was acquired by Brocade Communications in 2008.
Riley is the most recent to be implicated, and it appears he is the first CIO, but he is by no means the first tech exec to be embroiled in the scandals. In fact, he joins quite a crowd of execs who, over the last three years, have been charged and convicted of insider trading. Among them:
Mark Anthony Longoria, former supply chain manager with AMD
Ali Hariri, former vice president of broadband carrier networking at Atheros Communications
Daniel DeVore, former global supply manager at Dell
Walter Shimoon, former senior director of business development at Flextronics Corp.
Robert W. Moffat Jr., former senior vice president and group executive for IBM's Systems and Technology Group
Manosha Karunatilaka, account manager at Taiwan Semiconductor Co.
The government's announcement of Riley's arrest didn't specify the circumstances under which he may allegedly have passed along the information, but many earlier cases involved so-called expert network firms. These firms maintain a pool of industry experts as part-time consultants and match them with clients who want to learn about specific industries, companies, or technologies. Clients are often private investors like hedge funds. In several cases, an expert network firm called Primary Global Research was hiring executives and mid-level managers of public companies as consultants, and paying then hundreds of dollars per hour for participating in phone calls with clients.
According to their plea agreements, these tech executives made loads of money for this part-time work. Longoria, for example, who admitted to divulging confidential information about AMD 's revenue and gross margin in 2008 and 2009, made about $200,000.
It's not clear whether these tech firms had policies about whether employees were allowed to moonlight for such firms. While the expert network firms will tell you they are not designed to ferret out confidential information, it's pretty easy to imagine how a hedge manager might convince, cajole, or maybe even trick a tech employee into revealing more than is appropriate or legal.
Because the story of the involvement of tech professionals in these insider trading cases is not well publicized, I wonder whether corporate compliance offices have made any changes to tighten up the rules or better educate executives and managers about what's legal and not legal to share. If they haven't, they should. Because the government's investigation continues.
With Riley's arrest, "the ranks of privileged professionals who behave as if they are above the law continue to swell," said Manhattan US Attorney Preet Bharara in a press release.
George Venizelos, an assistant director at the FBI, added: "There may be little to distinguish this case from the dozens of others we have made against industry insiders and investment advisers in the past several years. There is certainly nothing unique about the outcome: If you allegedly traffic in inside information, by providing it or trading on it, you will inevitably be found out, charged, and prosecuted."
Excellent point, David. It will be very interesting to see the role social media play. Just recently, the SEC approved the use of Facebook and Twitter as channels by which companies can make official announcements. So now what if the CEO of Company X mentions he's having lunch with the CEO of Company Y - maybe a tipoff of a merger?
"If you allegedly traffic in inside information, by providing it or trading on it, you will inevitably be found out, charged, and prosecuted."
Although I support the FBI's efforts, George Venizelos statement is a bit hopeful. I'm sure for everyone found out, charged, and prosecuted, there are ten that aren't. The problem a not only impacts the perpetrators, but also the employees of the companies who hold options, stock or both.
I'm waiting for social media to play a bigger role in Insider Trading.
What if a key employee at Company X notes on Facebook or LinkedIn that they are visiting Mountain View, California. Heck, what if a key employee uses TripIt for travel planning and forgets that once upon a time they linked TripIt to a social media site. A key employee (or employees) visiting Mountain View would be very interesting to many an investor.
Would it be insider trading if an employee "simply" posted travel plans, or who they had lunch with on social media. With so many tracking tools, integration of tools, and social media sites - many folks have lost track of what they share. How does this fit into the future world of Insider Trading?
There's no amount of ICT security that can help with human "errors" such as this. Companies need to trust their employees and try to have as many traps as possible.
They turn slower because money becomes more relevant for them to battle over. It's terrible in this country in terms of how much the all mighty dollar plays a role on things, including the justice system.
Absolutely - these cases are very complex. The FBI used techniques in these cases that are not normally used in white-collar crime, such as wiretapping phone calls. They have literally thousands of hours of taped conversations. The government's approach has been to arrest a few suspects, then pressure them into a plea bargain in which they implicate others, then rinse and repeat. They've been doing this for years now and the convictions have piled up. I would imagine there are certain managers/employees in the tech industry who are pretty nervous. It will be interesting to see who is arrested next.
@Tobyd: Don't you think that there are others involved in this act ? Those who have not got caught and will never get caught because they have taken security measures right from the beginning itself ?
One aspect of insider trading is the sale of pre-IPO stock to client firms by the lead underwriter. While the rest of us are challenged to get even a dozen shares in the IPO the insiders get a boatload and then dump them at the open leaving the little guy holding onto his often now worthless dozen shares...this needs to be addressed too.
These cases do seem to take a long time, but I think in this case it's because the SEC is trying to find and arrest so many executives. They appear to be untangling a lot of different webs, with each arrest leading to another one. I'd think there's a lot of data to search in this type of legal case, too; you have to wade through stock prices and individuals' stock sales, perhaps their families' stock sales and purchases, and try to find out common threads. These are pretty complex cases, nothing like a store robbery captured on video tape where cops find the thug outside with the case of beer and owner's wallet in his hands.
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How big a cybersecurity breach may a company have before it must disclose that information in its filings with the US Securities and Exchange Commission? That's a question many CIOs and CFOs are -- or should -- be considering. So far, however, few government experts are giving them much direction.
The term "supply chain" typically evokes a string of parts that are progressively integrated into a final result -- a consumer product -- such as an automobile or computer.
Mention counterfeit products and most people think of fake Rolexes, imitation Coach bags, and bootlegged DVDs. Mention counterfeits in information technology, and CIOs and IT managers might think of routers.
New York's Metropolitan Transit Authority is conducting a pilot test of digital kiosks to guide subway users to where they want to go more efficiently and at lower cost.
The whole Amazon.reader debate is a double-stupid. It's stupid to think that there's any e-book buyer who doesn't know Amazon's URL, and it was stupider to let ICANN launch the whole free-form TLD initiative to start with.
While NFC's original goal was to enhance mobile commerce applications, it is finding its way into a number of other uses, which is creating both opportunity as well as challenges for IT departments.
Enterprises would like to move to cloud computing but are hesitant because they are concerned about providers’ ability to secure company data. Here are some tips that help to ensure that if breaches occur, the business is not left holding the bag.
Edmunds separates customers into segments based on the info it collects on its site and from partners, and uses that to push out custom content, said Brian Baron, director of business analytics for Edmunds.com, at Predictive Analytics Innovation Summit.
The automotive website uses propensity modeling to target ads and customer registration forms, said Brian Baron, director of business analytics for Edmunds.com, at Predictive Analytics Innovation Summit.
Expert Integrated Systems: Changing the Experience & Economics of IT In this e-book, we take an in-depth look at these expert integrated systems -- what they are, how they work, and how they have the potential to help CIOs achieve dramatic savings while restoring IT's role as business innovator. READ THIS eBOOK
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