Two Guilty Pleas Forthcoming at Tipster Trial

The Justice Department has bagged one guilty plea today, and is on the verge of a second in the ongoing "expert witness" insider trading probe. The guilty plea was rendered by former SAC Capital Advisors manager Donald Longueuil. Talks are underway with Don Ching Trung Chu, who has waived his right to be indicted by a grand jury – a step usually preliminary to a plea deal.

Chu was one of a dozen individuals arrested in the probe of insider trading facilitated by so-called expert networks. Even if he pleads not guilty, the chances are that he will end up with a plea arrangement. Chu's lawyer, James Devita, explained to Bloomberg:

"I don't have a resolution to this case yet. I can tell you that he's not requiring the government to go to a grand jury and obtain an indictment against him, but we have yet to resolve this case and it won't be today."

Chu, out on bail, has received numerous adjournments since his November arrest, a signal of possible plea negotiations. As an expert at Primary Global Research, Chu stands accused of tipping off former SAC trader Richard Choo-Beng Lee regarding several companies. Lee, who has already pleaded guilty, and a former Galleon Group analyst named Ali Far, allegedly used the inside information at their hedge fund, Spherix Capital.

Should Chu plead guilty, that would make him the sixth accused person to do so in the case. Two other individuals are known to be in plea talks: Samir Barai, a hedge fund manager, and Mark Longoria, a former Primary Global consultant.

Eric Bank, Freelance Writer

© 2011 Hedge Fund Writer LLC

Rajaratnam Jury Listens To Tapes Again; Drimal Guilty

Craig Drimal

Two days into the blockbuster Galleon insider trading trial jury deliberations, the panel heard nine requested excerpts over a one-hour period. The jury has not rendered any verdict yet, but the tapes may spur the process along. Jurors cannot consult transcripts of the tapes.

The 14-member panel consists of 12 juror and two alternates. The requested tapes included ones featuring prosecution witnesses Rajiv Goel and Anil Kumar. Both claimed to have forwarded inside information to Raj Rajaratnam and his brother Rengan. Another tape featured a conversation between Raj Rajaratnam and Krish Panu, a director at PeopleSoft. Neither Rengan Rajaratnam nor Panu stand accused of any crimes.

On a separate front, Galleon trader Craig Drimal pleaded guilty to insider trading following his unsuccessful attempt to suppress wiretap tapes against him. As we reported, U.S. District Judge Richard Sullivan rejected Drimal's bid to throw out the tapes last week.

His plea, guilty to conspiracy and securities fraud, mark him as the 21^st individual to enter guilty pleas in the case so far. The trial for the remaining four suspects begins on May 16.

Drimal's attorney, JaneAnne Murray, said

"He deeply regrets his actions and is now focused on his future with his wife of 30 years and his three children".

Of course, his deepest regret is having been caught. Drimal will have up to 105 years in the Big House to contemplate his regrets when he receives his sentence on September 9.

Eric Bank, Freelance Writer

SEC Catches Fraudsters Before They Can Strike

Its not every day that a team of hedge fund fraudsters is so spectacularly incompetent that the SEC catches them before any harm is done. But that is exactly what's happened to Elijah Bang and Daniel Lee, whose Beverly Hills hedge fund, IU Group, was shackled before it lined up a single victim. The SEC won an emergency shutdown order against IU Group for what it called "flagrant misrepresentations" to would-be investors. 

Bang and Lee are old pros at fraud. In 2009, California ordered them to stop illegal and fraudulent securities sales. This time, they invented a four-year track record for a one-year-old company, and imbued it with $800 million in non-existent funds and a made-up client list of actors, athletes, producers, academics, physicians, and businessmen. Their current pitch was for Christians: their websites proclaimed them to be "devoted Christians who believe in God, Jesus Christ and the Holy Spirit."

Besides the emergency order stopping their evil plan, the two hapless hoodwinkers face civil and perhaps criminal charges.

Eric Bank, Freelance Writer

© 2011 Hedge Fund Writer LLC

The Week Starts with A Flurry of Activity

Call it Madcap Monday, but today there are several stories vying for attention in the non-stop world of hedge fund crime. Here is a summary:

Galleon Trial

The case is about to go the jury. It was expected that U.S. District Judge Richard Holwell would instruct the jury following the final rebuttal by the prosecution. This after John Dowd, lawyer for Raj Rajaratnam, spent over five hours delivering his closing argument. His basic thesis: Rajaratnam did "nothing wrong." Rajaratnam is looking at decades of hospitality at the Big House should he be convicted.

On another front in the Galleon case, Jason Goldfarb, a lawyer, pleaded guilty on Thursday to securities fraud and conspiracy for his role in buying confidential information from two other lawyers in his firm, Ropes & Gray. Goldfarb can now avoid a trial that was slated for mid-May and that features Zvi Goffer, a former Galleon trader. Arthur Cutillo and Brien Santarlas, the two Ropes & Gray lawyers, have already pleaded guilty to accepting money in exchange for information. Goldfarb is looking at a three-to-four year vacation at the Graybar Hotel when he receives his sentence on August 19.

Petters Ponzi Scheme

David Harrold and Bruce Prevost, of Palm Beach Capital Management, have pleaded guilty to lying to investors about the Thomas Petters Ponzi scheme, only 20 days after their indictment. Both men can be stamping out license plates for the next 20 years following sentencing. Palm Beach is accused of secretly swapping out old Petters promissory notes for new ones. Palm Beach contributed over $1 billion to the Ponzi scheme. Thomas Petters, the ringmaster, will be savoring prison cooking for the next 50 years following his jury conviction.

Amaranth Advisors

Brian Hunter was fined $30 million by the Federal Energy Regulatory Commission (FERC) for trying to manipulate the natural gas futures market. Hunter oversaw the spectacular collapse of the Amaranth Advisors hedge fund four years ago. Hunter is declining to pay, stating his Canadian citizenship and what he terms the FERC's lack of jurisdiction over futures markets. Hunter will appeal FERC's finding that Hunter sold futures "with the intent to depress prices and financially benefit his significant derivatives positions held on other platforms."

The Commodity Futures Trading Commission (CFTC) is suing Hunter over the same charges. Amaranth settled CFTC and FERC charges two years ago by paying a $7.5 sum, but Hunter was excluded from that settlement.

Phidippides Capital Management Ponzi Scheme

He's already doing ten years in prison. Now, Mark Trimble, former hedge fund manager at the Phidippides Capital Management Ponzi hedge fund is looking at decades more of incarceration. Prosecutors are now accusing Trimble of wire fraud, mail fraud and money laundering in connection with ripping-off his bicycle coach and of violating a ban against trading. Trimble apparently invested $111,000 of his coach's money, losing $40,000 in the process. Trimble could spend another 30 years behind bars.

Eric Bank, Freelance Writer

© 2011 Hedge Fund Writer LLC

Judge OKs Wiretaps in Second Galleon Trial

U.S. District Judge Richard Sullivan has agreed to let prosecutors use the Rajaratnam wiretap evidence in the upcoming second Galleon trial against five defendants accused of insider trading. The ruling parallels a similar one reached by Judge Richard Holwell in the current Rajaratnam trial. Both have some reservations with a few of the tapes but, Judge Sullivan ruled:

"Given the wiretap's scope and the substantial manpower needed to sustain it, the court concludes that, on the whole, the wiretap was professionally conducted and generally well-executed." He acknowledged mistakes were made "when agents we presumably still learning to recognize the voices of [Craig] Drimal's interlocutors as well as identify their patterns of conversation. Having reviewed the wiretap in its entirety, the court is persuaded that in the vast majority of calls, the government's monitoring of the Drimal's spousal communications was reasonable."

The five defendants include:

• Craig Drimal – it was his bid to ban the wiretaps that Judge Sullivan rejected, despite the FBI's inappropriate taping of intimate conversations between Drimal and his wife.
• Zvi Goffer – a former Galleon trader, he is accused of heading an insider-trading ring tied to the one run by Raj Rajaratnam.
• Emanuel Goffer – Zvi's brother employed by Goffer's Incremental Capital hedge fund.
• Michael Kimelman – also worked at Incremental Capital.
• Jason Goldfarb –an attorney at the law firm that leaked many tips to Goffer.

Eric Bank, Freelance Writer

© 2011 Hedge Fund Writer LLC

Indiana Hedge Fund Manager Sued for Fraud

Authorities in the state of Indiana have accused Keenan Hauke of stealing money from investors. According to the suit, Hauke:

“intentionally received funds from the bank accounts of Samex Partners that were illegally converted from investors, misled investors by failing to inform them that the funds they were investing would be converted to his personal use. Hauke employed a device, scheme or artifice to defraud investors of Samex Partners. Specifically, he sold investments, in the form of hedge fund interests, to investors under the guise that the hedge fund invested in liquid publicly traded securities."

Hauke's assets and those of Samex Partners, Hauke's hedge fund, were frozen last week by the case judge. Until a preliminary hearing is held on April 25, Hauke and Samex are prevented from conducting business.

Scott Noble, a former Samex employee, tipped off the Indiana Secretary of State to what he called "financial irregularities" at the firm. According to the Indiana Business Journal, when a Hauke's attorney Larry Mackey attempted to paint whistle blower Noble as a thief trying to steal clients from Samex, Noble countered that

“I did not do this to pilfer clients. I did this because there were documents that showed really bad things. I have been stunned since I found those documents. I don't think I've slept a full night since this started."

Hauke, often described as "quirky", is locally known for numerous TV appearances and, until last year, for his column in the Indiana Business Journal.

Eric Bank, Freelance Writer

© 2011 Hedge Fund Writer LLC

Pulitzer Prize Awarded for Magnetar CDO Stories

We recently reported on JP Morgan's ongoing attempts to negotiate a SEC settlement of its notorious Squared CDOs caper, in which it marketed securities at Magnetar's behest while Magnetar was simultaneously shorting them. Now, the Pulitzer Prize has been awarded to ProPublica for a series of articles that made the intricacies of the story accessible to just about any reader.

Reporters Jesse Eisinger and Jake Bernstein won the coveted yearly award for what the Pulitzer Prize committee called:

"…questionable practices on Wall Street that contributed to the nation's economic meltdown, using digital tools to help explain the complex subject to lay readers."

Magnetar was a central player in the series that featured cartoons and graphics to help explain the complex world of Collateralized Debt Obligations. The SEC is investigating JPMorgan Chase over its role in marketing these turkeys at Magnetar's behest. For the record, Magnetar has yet to be charged with any wrongdoing. Magnetar has informed ProPublica last year that it "did not at any time require or expect any specific assets to be purchased into the Squared."

Magnetar purchased the riskiest portions of various CDO securities, allowing banks to synthesize an offering, termed Squared. The case parallels last year's case, in which Goldman Sachs reached a settlement with the SEC over a similar issue. There, the charge was that Goldman was structuring and marketing CDOs recommended to Goldman by the Paulson & Co hedge fund, even as Paulson was shorting those same CDOs. The settlement cost Goldman $550 million. The charges were that the CDOs were dogs and that Goldman was shafting its customers as it and Paulson profited on the loser CDOs.

"This is the kind of thing that the mainstream media's doing less and less of," Eisinger told the Associated Press. "We're deeply grateful that it's being recognized."

Eric Bank, Freelance Writer

© 2011 Hedge Fund Writer LLC