The SEC said the case involved closely associated hedge fund traders at Stamford, Conn.-based Diamondback Capital Management LLC and Greenwich, Conn.-based Level Global Investors LP.
Anthony Chiasson, a co-founder at former hedge fund group Level Global Investors, was among four men arrested Wednesday. He surrendered to the FBI in New York, where he lives.
In court papers, he was credited with a starring role in the securities fraud. Authorities said a hedge fund analyst fed Chiasson inside information about an upcoming announcement of Dell's earnings for the first and second quarters of 2008, allowing Chiasson and others at his hedge fund to make approximately $57 million in illegal profits through trades. Inside information about Dell earnings resulted in $3.8 million in illegal profits at another hedge fund and $1 million in illegal profits at a third hedge fund, the complaint said. The Dell inside information also allowed an investment firm to avoid losses of approximately $78,000, authorities said.
Bail for Chiasson was set at $2.5 million after Assistant U.S. Attorney David S. Leibowitz told a magistrate judge at Chiasson's initial court appearance in Manhattan that the allegations against him were "staggering" and, if successfully proved, could result in a prison sentence of at least 10 years. He said the $53 million Chiasson earned for his hedge fund by shorting Dell stock on early word that its earnings would disappoint was the largest illegal trade ever cited in a criminal case in federal court in Manhattan.
Leibowitz said it took Rajaratnam six years and dozens of trades to accumulate the $70 million in profits alleged by the government in his case. The prosecutor requested a $5 million bail, saying Chiasson was worth at least $40 million and had earned as much as $11 million in a year at his hedge fund.
Chiasson's lawyer, Gregory Morvillo, said his client knew the government was after him when agents raided his office 14 months ago and looked forward to defending himself.
"He didn't do anything wrong, and he wants an opportunity to clear his name," Morvillo said.
Jon Horvath, an analyst at Sigma Capital Management, an affiliate of hedge fund SAC Capital Advisors in Manhattan, was arrested at his New York City home while Todd Newman, a hedge fund portfolio manager, was arrested in Needham, Mass. Analyst Danny Kuo, of San Marino, Calif. also was arrested.
Among those who have pleaded guilty to charges of conspiracy and securities fraud and are cooperating in the case was Sandeep Goyal, of Princeton, N.J., who worked from the summer of 2006 through May 2007 for Dell at its corporate headquarters in Round Rock, Texas, and obtained inside information from employees of Dell after he began working as an associate analyst for a global asset management firm in Manhattan, court papers said.
According to court papers, Goyal benefited from his relationship with a co-conspirator who worked in Dell's investor relations department from March 2007 through March 2009 and in its corporate development office from March 2009 through April 2010. Authorities said a hedge fund with $4 billion in assets in 2009 paid Goyal about $175,000 for providing insider information about Dell.
Another cooperator was identified as Jesse Tortora, of Pembroke Pines, Fla. The SEC said Goyal tipped Tortora who then tipped several others, leading to insider trades on behalf of the Diamondback and Level Global hedge funds.
The third cooperator was identified as Spyridon (Sam) Adondakis, a Level Global analyst. The SEC said he tipped Chiasson, his manager. Adondakis also lived in New York City.
"These are not low-level employees succumbing to temptation by seizing a chance opportunity," Khuzami said. "These are sophisticated players who built a corrupt network to systematically and methodically obtain and exploit illegal inside information again and again at the expense of law-abiding investors and the integrity of the markets."
FBI agent David Makol said in court papers that the government built its case through information provided by the three cooperators, consensually recorded conversations, court-authorized wiretaps, telephone records, trading records, electronic communications, documents provided by a cooperator and other documents obtained from two hedge funds. The hedge funds were not identified in court papers.
Messages seeking comment left with lawyers for the other defendants were not immediately returned.
In a letter to investors, Diamondback Advisors co-chief investment officers Richard Schimel and Larry Sapanski called the actions by prosecutors and the SEC "an important step towards putting this matter behind us."
The company has fully cooperated with authorities since learning of the inquiry and believed the "fruits of that cooperation" were reflected in the charges announced Wednesday, they said. Newman was placed on leave immediately after the Nov. 22, 2010, search, and Tortora resigned from the firm in April 2010, they added.
Associated Press writers Mark Pratt in Boston and Marcy Gordon in Washington contributed to this report.
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