NEW YORK (Reuters) - An outspoken research analyst who made waves by refusing to cooperate in the U.S. government’s broad insider-trading probe was charged with illegally supplying hedge funds with tips as part of his consulting service.
The charges against the analyst, John Kinnucan of Portland, Oregon, were announced on Friday shortly before a former executive at flash memory chipmaker SanDisk Corp pleaded guilty to conspiring to divulge company secrets to an unnamed consultant. A source close to the probe, who declined to be identified, said that consultant was Kinnucan.
Kinnucan appeared in U.S. District Court in Portland, Oregon, on Friday afternoon wearing light blue jail clothing. After a hearing that lasted about 20 minutes, Judge John Acosta ordered him held in custody until another hearing on Wednesday.
Between 2008 and 2010, investigators said, Kinnucan paid insiders with cash, trips and other benefits to get secret information, including sales trends for Apple Inc’s iPhone.
Kinnucan then funneled the information to hedge fund traders in California and New York in exchange for hundreds of thousands of dollars, investigators said.
One person who allegedly got tips from Kinnucan was a former portfolio manager with Dallas-based Carlson Capital, a $6.5 billion hedge fund. Carlson issued a statement on Friday that the manager who had worked in New York had left the firm in March 2011 and had been there for just nine months. Carlson said it was cooperating with the probe and that it was not a target of the investigation.
The hedge fund did not identify the manager, but three sources familiar with the government’s investigation said that it was Dan Grossman. Sources said Grossman had retained a lawyer, but attempts to reach the lawyer were unsuccessful. Grossman has not been charged with any wrongdoing.
Before joining Carlson Capital, Grossman worked at hedge fund Level Global.
Level Global shut down last year only months after FBI agents raided it in connection with the government’s insider trading probe. Last month Level Global co-founder Anthony Chiasson was charged in the insider probe.
Kinnucan was arrested late on Thursday, more than a year after he was first linked to Operation Perfect Hedge, the federal probe into the trafficking of corporate information among analysts, corporate executives and hedge fund traders.
The 54-year-old Kinnucan briefly became a media sensation when he went public in 2010 with his refusal to wear an FBI wire to cooperate with the investigation. He then sent a widely circulated email to current and former clients of his firm, Broadband Research, to alert them to the probe.
Prosecutors charged Kinnucan with two counts of securities fraud and two counts of conspiracy.
He was also charged with insider trading in a civil case filed by the U.S. Securities and Exchange Commission. Both cases were filed in the U.S. District Court in Manhattan.
Kinnucan was expected to appear Friday afternoon in Portland federal court. He faces up to 20 years in prison on each of the securities fraud counts and one of the conspiracy counts, and up to five years on the other conspiracy count.
It is unclear whether Kinnucan has hired a lawyer for his criminal defense. Nathan Burney, a lawyer who has represented Kinnucan previously, declined to comment on Friday.
Former SanDisk executive Don Barnetson, 37, pleaded guilty to one count of conspiracy to commit wire fraud and securities fraud before U.S. Magistrate Judge Gabriel Gorenstein in Manhattan.
“I conspired with a consultant to provide confidential information with respect to my employer at the time, SanDisk Corp,” from a period from 2008 to 2010, he said in a staccato voice.
Barnetson faces up to five years in prison but could get leniency given what prosecutors called his “substantial cooperation.” Bail was set at $50,000. His lawyer Gary Villanueva declined to comment.
Federal prosecutors alleged that Kinnucan passed on corporate secrets as part of a consulting arrangement with at least two unidentified hedge funds, including one in Dallas.
Investigators said he gave clients material nonpublic information that he obtained from employees at a variety of public technology companies, causing three of those clients to reap roughly $1.58 million of illicit trading gains.
The companies included SanDisk, network equipment maker F5 Networks Inc and chipmaker Flextronics International Ltd, investigators said. Flextronics and SanDisk insiders provided information on Apple, they added.
“John Kinnucan used financial incentives, fancy meals and other inducements to curry favor with public company insiders so they would serve up their employers’ secrets,” U.S. Attorney Preet Bharara said in a statement.
In one alleged instance, Kinnucan called clients just minutes after learning from an F5 employee that quarterly revenue would beat Wall Street estimates.
One California portfolio manager then supposedly bought F5 shares to cover a short position — a bet the shares would drop— and avoided a $631,000 loss.
“Ty for having me cover ffiv,” the portfolio manager later wrote Kinnucan, referring to the stock ticker, according the government.
The F5 insider is cooperating with the government.
F5, Flextronics and SanDisk did not immediately respond to requests for comment.
Operation Perfect Hedge, made public in October 2009, has led to more than 60 people pleading guilty or being arrested. Among those convicted is Galleon Group hedge fund founder Raj Rajaratnam, now serving an 11-year prison term.
Kinnucan became something of a celebrity in the financial world in late 2010 after telling clients and the media he was refusing to cooperate with the government probe.
He sent an email that October to more than 50 people associated with roughly 20 hedge funds and mutual funds that he was a target.
Among these were Kenneth Griffin’s Citadel Group, Steven A. Cohen’s SAC Capital Advisors and Dallas-based Carlson Capital. None of the funds has been accused of wrongdoing.
“My clients are not some scummy fly-by-night hedge funds,” Kinnucan said in a December 2010 interview.
The Kinnucan cases are U.S. v. Kinnucan, U.S. District Court, Southern District of New York, No. 12-mag-00424; and SEC v. Kinnucan in the same court, No. 12-01230.
Reporting By Sinead Carew, Matthew Goldstein, Martha Graybow, Jonathan Stempel, Katya Wachtel, Svea Herbst-Bayliss, and Teresa Carson; Editing by Gerald E. McCormick and Steve Orlofsky and Matthew Goldstein