When Jason Pflaum joined Barai Capital in 2008 as an analyst he immediately hit the phones, calling public company contacts cultivated over the years by his boss, Samir Barai, prosecutors allege.
Mr Pflaum spoke with insiders at Fairchild Semiconductor and Actel, who allegedly gave him quarterly earnings information, including revenues, inventories, and gross margins, before the group released their earnings, according to court filings. By trading on the information, Mr Barai’s fund allegedly made $500,000 in profits. In exchange for the tips, prosecutors allege the Fairchild source received $48,000.
The Fairchild source was one of many contacts maintained by Mr Barai, who allegedly shared the information with Noah Freeman and Donald Longueuil, two portfolio managers at the SAC Capital hedge fund group.
The men operated a “triangle of trust” and worked with their own sources to glean non-public information about at least six companies going back to 2006, according to Preet Bharara, the US attorney in Manhattan. Two years later, Mr Pflaum allegedly destroyed documents at the direction of Mr Barai, and later pleaded guilty in a co-operation deal with the government in its ongoing investigation of alleged insider trading on Wall Street.
A spokeswoman for Fairchild said the company was co-operating with the probe. SAC has not been charged with any wrongdoing. Lawyers for Mr Barai could not be reached for comment and Mr Longueuil attorney declined to comment.
Authorities said more arrests were expected. The SEC said last week that at least 11 hedge funds could be implicated in the alleged insider trading scheme.
Mr Freeman and Mr Barai both maintained a network of inside sources at public companies and through Primary Global Research, an expert network firm that matches money managers with experts, according to court filings.
During regular conference calls, prosecutors allege, they shared the information with Mr Longueuil. They often listened together on calls with Winifred Jiau, who allegedly provided inside information about Marvell Technologies and Nvidia, according to court filings. Ms Jiau has denied wrongdoing.
Mr Freeman worked as a research analyst for Brookside Capital, the hedge fund affiliate of Bain Capital. In 2005 he moved to small Boston-based hedge fund Sonar Capital, where he was head of technology research, then subsequently joined SAC. He was let go last year.
Mr Longueuil worked as an analyst at Empire Capital, a technology focused hedge fund with $850m under management from 2004 to 2008. Empire declined to comment. Mr Longueuil subsequently joined SAC and was terminated last year.
After news reports last autumn that prosecutors were expanding their investigation to include expert network firms, Mr Barai began to panic, according to court filings.
“I think U [sic] just go into office. Shred as much as u can. Put all ur data files onto an encrypted drive,” Mr Barai pecked out on a BlackBerry Messenger note to Mr Pflaum.
Mr Freeman, who is co-operating with prosecutors, in December secretly recorded a conversation with Mr Longueuil in which Mr Longueuil allegedly described how he destroyed a USB flash drive and two external hard drives filled with information he obtained from company insiders.
“You take two pairs of pliers, and then you rip it open” and pull apart the contents, Mr Longueuil said. During a 20-block walk around the city, Mr Longueuil said he threw the contents of the destroyed memory cards “in the back of like random garbage trucks”.
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