Insider-Trading Case Accelerates With 'Expert'-Firm Arrest
By MICHAEL ROTHFELD, SUSAN PULLIAM and CHAD BRAY
A broad U.S. crackdown on insider trading accelerated as the government charged an employee at an expert-network firm with conspiring to leak confidential information. Prosecutors also won a legal victory against a founder of the Galleon Group hedge fund that cements their ability to use wiretaps against Wall Street investors.
The arrest Wednesday of Don Ching Trang Chu and the criminal complaint filed in federal court in Manhattan also show how prosecutors are using cooperating witnesses from their case against Galleon's founder, Raj Rajaratnam, to help them bring a separate and larger insider-trading case that is expected to continue unfolding between now and the end of the year.
Mr. Chu, 56 years old, is accused of providing inside information on a technology company to one of those cooperators, a hedge-fund manager, and of arranging meetings for the manager with public company employees to receive nonpublic information.
Mr. Chu was taken into custody by federal agents at his Somerset, N.J., home, in what is the first known arrest in a wide-ranging case that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders and analysts across the nation.
A lawyer for Mr. Chu declined to comment.
Don Ching Trang Chu Wednesday.
Mr. Chu worked for Primary Global Research LLC, a Mountain View, Calif., "expert network" firm that connects consultants including employees at publicly traded companies with hedge funds and mutual funds seeking an investing edge.
Expert-network firms are a key focus of a three-year probe that people familiar with the matter say could prove as jarring to the financial industry as any past insider-trading investigation.
Authorities are investigating employees and consultants for these firms in part as a means to probe hedge funds, mutual funds and other investors suspected of trading on material nonpublic information, people familiar with the matter have said.
Primary Global on Wednesday said that based upon recent events it had severed its relationship with Mr. Chu. He was listed earlier this week on its website as a specialist in Asia and data resources. A Web page listing him and other employees was no longer accessible Wednesday.
At the same time, the government's win on a legal issue in the Galleon case Wednesday strengthened the hand of investigators who have begun to depend on wiretaps to prosecute insider trading.
A federal judge ruled that prosecutors acted properly in seeking approval to make secret recordings of thousands of phone calls of Mr. Rajaratnam, who has pleaded not guilty, and 130 of his friends, relatives and associates. A representative for Mr. Rajaratnam declined to comment Wednesday.
The Galleon case and the latest probe, while distinct, also are connected at least through the role of a former hedge-fund manager, Richard "C.B." Lee, who once worked with Mr. Rajaratnam and who, according to the complaint against Mr. Chu, sought investment tips from Mr. Chu.
The complaint alleges Mr. Chu provided inside information about Atheros Communications Corp. directly to Mr. Lee, who was cooperating with authorities at the time. Mr. Chu also allegedly arranged a conversation for Mr. Lee with a Primary Global consultant who worked for an unnamed technology company and revealed quarterly earnings that hadn't yet been released, the complaint says.
In an interview this past Sunday with the Federal Bureau of Investigation, Mr. Chu allegedly said he knew that a Broadcom Corp. employee and a Sierra Wireless Inc. employee—both consultants for Primary Global in Asia—had given out nonpublic revenue information for their companies, according to the complaint.
None of the companies is accused of wrongdoing.
Atheros said in a statement that if requested, the company "will cooperate fully in any government investigation." Sierra Wireless said the employee mentioned in the complaint is "not a director or officer," and said the company would "cooperate fully." Broadcom didn't respond to requests for comment.
The complaint said the unnamed technology is listed on the New York Stock Exchange and reported second-quarter earnings on the afternoon of July 21, 2009. Advanced Micro Devices Inc. is the sole NYSE-listed technology company that reported financial results at that time on that date.
A spokesman for AMD noted it isn't referenced anywhere in the government documents and said "therefore we have no comment."
The complaint detailed conversations that were recorded by Mr. Lee with Mr. Chu.
During a meeting recorded in August 2009, Mr. Lee told Mr. Chu that one consultant had provided financial results that were "on the spot," according to the criminal complaint. Mr. Chu allegedly replied, "All depends on the person.... some guys willing to talk, some are not." Later, asked by Mr. Lee if he and colleagues were "nervous," Mr. Chu allegedly acknowledged, "I'm nervous."
Mr. Chu allegedly told Mr. Lee that getting "involved in the States... it's dangerous," and that the Securities and Exchange Commission is "too strong." He allegedly said, "In Asia, the SEC can't do too much." He warned Mr. Lee to avoid even personal email: "just talk .... don't, don't put it down in writing. Dangerous."
A lawyer for Mr. Lee said his client is cooperating with authorities and will continue to do so.
The complaint highlights the use of "soft dollar" payments by investment firms. Hedge funds commonly build up soft-dollar accounts with brokerages by directing trades to those brokerages. Hedge-fund clients in turn direct the brokerages to use soft-dollar credits, as opposed to cash, to pay for access to expert-network consultants and other valuable research.
According to the complaint against Mr. Chu, Mr. Lee's hedge fund around late 2008 and early 2009 directed a prime broker to send soft dollar payments to Mr. Chu's firm in exchange "for access to its consultant network and services."
Mr. Chu, a naturalized U.S. citizen and Taiwan native, has been charged with one count of conspiracy to commit securities fraud and one count of conspiracy to commit wire fraud and fraud in connection with securities. The first count carries a maximum sentence of five years and the second up to 25 years. Both carry a potential fine of $250,000 or twice the gross gain or loss from the offense, prosecutors said.
Mr. Chu briefly appeared in Manhattan federal court on Wednesday. He was released on $1 million bail, to be secured by his New Jersey home. He surrendered his passport and his travel was restricted to parts of New York, Pennsylvania and New Jersey.
—Jenny Strasburg, Shira Ovide and Don Clark contributed to this article.
Write to Michael Rothfeld at email@example.com, Susan Pulliam at firstname.lastname@example.org and Chad Bray at email@example.com
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