Reporting from New York — A federal effort to root out illegal stock trading allegedly based on inside information from networks of corporate executives gained traction with the arrests of four tech industry figures and the disclosure of a guilty plea by a fifth.
One of those arrested, a former employee of a supplier of parts for Apple Inc.'s iPhone and iPad, is accused of passing along secret information about those wildly popular products.
The central figure in Thursday's arrests was James Fleishman, a former salesman at Primary Global Research, one of several so-called expert-network firms that prosecutors have investigated in recent months.
Fleishman is accused of serving as a middleman between executives who had confidential information about their companies and high-powered investors such as hedge funds that wanted that information to make lucrative bets on stocks, according to a criminal complaint filed in Manhattan federal court.
The other three people arrested Thursday worked at tech companies and moonlighted as consultants to Primary Global in Mountain View, Calif., which paid them a total of $400,000, the filing says.
In the last month, authorities have raided the offices of three hedge funds and subpoenaed to several hedge funds and mutual funds in the latest chapter of a broad federal probe of suspected insider trading at financial firms. Another ex-employee of Primary Global, Don Ching Trang Chu, was arrested in November.
The complaint unsealed Thursday indicates how many tentacles the government's current investigation has. In addition to the four men arrested, the complaint makes reference to five cooperating witnesses, one of whom is an analyst at a New York hedge fund.
The complaint also refers to a number of other employees at New York hedge funds who allegedly received inside information. They apparently have not been cooperating but have not been charged.
"If I had to bet money, my bet would be that there are other folks they are looking at — and we haven't heard the end of this just yet," said Howard Kramer, an expert in securities law at the Washington firm Schiff Hardin. "It definitely ratchets up the heat."
Janice Fedarcyk, an FBI agent working on the case, said in a statement after the arrests that "our investigation is most assuredly continuing."
"The information trafficked by the four 'consultants' went way beyond permissible market research; it was insider information," Fedarcyk said.
In addition to Fleishman, the men arrested Thursday include Walter Shimoon, who worked in San Diego for Apple supplier Flextronics International Ltd.; Mark Anthony Longoria, who worked in Texas for chip-maker Advanced Micro Devices; and Manosha Karunatilaka, who worked in Massachusetts for Taiwan Semiconductor Manufacturing Co.
U.S. Atty. Preet Bharara, the federal prosecutor leading the investigation, also announced that Daniel Devore, a former employee at computer maker Dell Inc. who also was a Primary Global consultant, pleaded guilty last week to fraud and conspiracy and was cooperating with the government.
A spokesman for Primary Global Research said that the firm had put Fleishman on leave.
AMD, Dell and Flextronics all released statements saying they had policies prohibiting the consulting the men did. Taiwan Semiconductor did not respond to requests for comments.
A lawyer for Longoria said he had been cooperating with authorities. Attorneys for Devore and Karunatilaka declined to comment. Lawyers for the other defendants did not respond to messages.
The current probe has been built from a series of cases that prosecutors have brought in the last two years alleging insider trading at hedge funds. The best known of these cases involves hedge-fund operator Galleon Group and its founder, Raj Rajaratnam, who is awaiting trial.
The investigation appears to break new ground with its emphasis on expert networks, which are a relatively new invention in the
financial industry. There is widespread suspicion in the industry that these networks may be part of the reason some hedge funds have posted outsize returns in recent years.
Of the consultants arrested Thursday, Longoria was the best paid, collecting more than $200,000 in addition to the salary he received from AMD, according to the complaint.
Longoria, a supply chain manager for the Sunnyvale, Calif., company, is accused of providing confidential information about AMD's sales and shipments to several hedge funds that Fleishman allegedly connected him to.
After Rajaratnam was arrested in the fall of 2009, Fleishman reassured Longoria that the AMD information had never been provided to Galleon Group.
"OK, good," Fleishman said in wiretapped phone conversation. "So there's no way they can tie 'em back to me."
"It made me extremely nervous," Longoria said.
Shimoon's Singapore-based company, Flextronics, provided chargers and cameras for Apple products and Shimoon was given access to Apple documents and meetings, the government's filing says.
In 2009, Shimoon caught wind of a secret project known within the company as "K48" that ended up developing the iPad. Shimoon told a client of Fleishman's about the project, and noted how secretive the company was about it.
"At Apple you can get fired for saying K48," Shimoon said in a wiretapped phone call, according to the complaint. "That's how crazy they are about it."
Shimoon also allegedly expressed to one of the cooperating witnesses his anxiety about getting caught.
"That would really suck if you recorded all the calls," Shimoon said on a call that was being taped by the FBI.