Reporting from Los Angeles and Mountain View, CA. — Hedge fund managers looking for an edge in the financial markets in recent years could turn to Primary Global Research, a boutique firm in the heart of the Silicon Valley with connections around the world.
Now the company isn't answering the phone, the front doors of its Mountain View office are locked and some of its former employees are facing possible prison time.
Founded in 2003 by former Intel Corp. manager Unni Narayanan, Primary Global is at the center of an ongoing Justice Department insider-trading crackdown on the sale of privileged information that could affect stock prices.
In recent weeks federal prosecutors have filed criminal charges against eight people with connections to Primary Global: three employees and five consultants that the company allegedly paid to disclose secrets about publicly traded companies, many of them well-known technology firms.
Primary Global is in the business of "expert networking" — matching outside consultants, primarily employees of public companies, with hedge fund analysts and other money managers who pay hundreds of dollars an hour for access to their knowledge. That activity is legal as long as the experts do not disclose nonpublic information such as plans for new products or an early peek at earnings that could give clients an unfair advantage over other investors.
The case against the Primary Global employees and consultants is based largely on wiretaps and other secret recordings that prosecutors said captured the sale of inside information.
Walter Shimoon, a manager in the San Diego office of Flextronics International, is one of the Primary Global consultants charged in the case. He was secretly recorded while telling an unidentified Primary Global client the number of cameras that Apple Inc. had ordered for use in iPhones, as well as the company's plans for its iPad tablet computer — a product so covert that Apple code-named it K48, prosecutors said in court documents.
"We're working with them on the camera. They, you know, are very secretive, right? So I don't have [an] exact time frame, but I've concluded we'll start building modules probably in March.... So probably sometime in May, they'll have a big, you know, big launch," Shimoon reportedly said in an October 2009 call while discussing plans for the iPhone 4 with a hedge fund analyst.
Primary Global paid Shimoon $22,000 for his services from 2008 to 2010, prosecutors said. Other experts made significantly more. Mark Longoria, a supply manager at Advanced Micro Devices Inc. who also has been charged, earned more than $200,000 over roughly the same time period, prosecutors said. Shimoon and Longoria have not yet entered pleas to charges of wire fraud and conspiracy to commit wire fraud and securities fraud.
Expert-networking firms have exploded in the last decade, the result of Securities and Exchange Commission regulations adopted in 2000 that required public companies to disclose material information to everyone at the same time. The new rules increased demand for firms that could connect analysts with experts who could provide an edge, said Michael Mayhew, chairman of Integrity Research Associates, a New York firm that analyzes the performance of investment analysts.
Primary Global was one of the largest beneficiaries, charging asset managers steep fees to pick the brains of its stable of outside consultants. The company's revenue reached an estimated $20 million to $25 million a year, making it among the top five expert firms in the country, Mayhew said. Primary Global also employed a team of in-house research analysts who were frequently quoted in publications that included the Wall Street Journal, Investor's Business Daily and Barron's.
"Users, not surprisingly, loved them for their expertise in the technology sector," Mayhew said. "They had built a pretty successful business."
On its website, Primary Global said its consultants "speak one-on-one with clients to provide up-to-the-minute intelligence on trends, issues, regulations and dynamics affecting a particular company." The firm said it strictly complied with all securities laws and would not permit its consultants to disclose privileged information that could affect stock prices.
But behind the scenes, Primary Global executives paid insiders at companies such as Dell Inc., Advanced Micro Devices and Taiwan Semiconductor Manufacturing Co. to divulge secrets to the company's hedge fund clients, prosecutors allege.
"This wasn't market research. What the defendants did was purchase and sell insider information," said Janice K. Fedarcyk, the FBI's assistant director in charge.