Those communications and others are at the heart of insider trading and obstruction of justice charges the government announced Tuesday in a widening investigation of hedge funds and firms that feed them research.
The Justice Department charged three hedge fund portfolio managers and one analyst in a criminal conspiracy that allegedly involved information about companies such as Advanced Micro Devices and Fairchild Semiconductor International.
The Securities and Exchange Commission, which filed civil charges against the defendants, said hedge funds and other traders involved in the alleged misconduct gained or avoided losing about $30 million based on inside information.
Two of the defendants, Barai and Donald Longueuil, a former research analyst and portfolio manager, were also charged with obstruction of justice in what the U.S. attorney in Manhattan, Preet Bharara, called a “brazen coverup.”
The government said Longueuil described his effort to destroy two computer flash drives in a recorded conversation with fellow defendant Noah Freeman, who at the time was cooperating with investigators.
According to the government, Longueuil told Freeman that he “pulled the external drives apart” with pliers. Then he put the pieces “into four separate little baggies,” stuffed them in his jacket, and at 2 a.m., “I go on like a 20-block walk around the city . . . and try to find a garbage truck.”
Longueuil said he threw the pieces “in the back of, like, random garbage trucks . . . four different garbage trucks.”
“I pressed the eject button and everything’s [expletive] gone,” he said.
At a New York news conference, Bharara said the coverup was “like something out of a bad movie.”
The alleged conspirators “lacked a mobster’s better-honed instinct for conversational discretion,” said Janice K. Fedarcyk, head of the FBI’s New York field office.
The investigation has resulted in criminal charges against 46 defendants over the past 18 months, including Galleon Group founder Raj Rajaratnam, who is awaiting trial. Twenty-nine of the defendants have entered guilty pleas.
Defendants employed at many hedge funds “cultivated and paid off entire networks of corrupt insiders at different public companies for blatantly illegal inside information,” Bharara said in a statement. That included “specific, on-the-nose information about corporate earnings before they were made public.”
The investigation involves insiders at publicly traded companies who moonlight as consultants to sell confidential information about their companies to traders — and so-called “expert network” firms that match traders with company insiders, SEC enforcement director Robert Khuzami said at the news conference.
Barai, 38, and Longueuil, 34, appeared in court Tuesday and were released on bail.
Barai is the founder of Barai Capital Management. Longueuil specialized in research and trading involving semiconductor and other technology companies, according to a court filing.
Freeman, 35, and the fourth defendant, Jason Pflaum, 37, previously pleaded guilty to the charges, the government said.
Working with the FBI, Freeman recorded meetings and phone conversations, according to a court filing.
Two of the defendants charged Tuesday were accused of engaging in insider trading while working for SAC Capital Advisors, a hedge fund manager founded by industry giant and noted art collector Steven A. Cohen, SAC made clear in a statement.
“We are outraged by the alleged actions of two former employees, which required active circumvention of our compliance policies and are egregious violations of our ethical standards,” SAC spokesman Jonathan Gasthalter said in the statement.
“They were employed at SAC for a short time and were dismissed in January 2010 and June 2010, respectively, due to poor performance,” Gasthalter said.
Ten of the individuals and one of the companies the SEC has charged in the ongoing investigation were consultants, employees or clients of one expert network firm, Primary Global Research. A spokesman for Primary Global Research declined to comment.
Lawyers for Barai and Freeman did not return messages. Lawyers for Longueuil and Pflaum each declined to comment.
Late on the night of Nov. 19, after the Wall Street Journal reported that the government was conducting a major insider trading investigation that involved expert network firms in general and one in particular, Barai communicated by BlackBerry with Pflaum.
A document filed in the case gives this account:
A firm Barai is accused of using “was the only one named!!!!!” Barai wrote, following up with an expletive that he elongated by typing the letter “u” five times.
Pflaum was already cooperating with investigators, and the next morning Pflaum resumed the exchange.
Barai urged Pflaum to shred and delete information. Then, he sent a less-panicked message.
“Let’s not worry . . . . No evidence we got exact info . . . . Forget the past . . . . No proof.”