Yet Another Insider Trading Case Begins to Unfold

Anthony Chiasson, a co-founder of Level Global, a hedge fund that is said to have made $53 million from illegal trades. Mike Segar/ReutersAnthony Chiasson, a co-founder of Level Global, a hedge fund that is said to have made $53 million from illegal trades.

The government has moved yet again in its effort to crack down on insider trading, filing charges against seven defendants with ties to hedge funds who federal prosecutors say operated as a “circle of friends” by trading information.

A criminal complaint filed in Federal District Court in Manhattan names four defendants, including Anthony R. Chiasson, co-founder of the Level Global Investors hedge fund, who is accused of orchestrating large trades in Dell that netted approximately $57 million in profits. The firm went out of business a few months after an F.B.I. raid at its office in November 2010.

The gains that Mr. Chiasson is accused of making for Level Global from the inside information puts him on a par with the former hedge fund manager Raj Rajaratnam, once described by prosecutors the “modern face of insider trading,” who is serving an 11-year term after his conviction for securities fraud. Under the federal sentencing guidelines, if Mr. Chiasson is found guilty of making $57 million through securities fraud, he will face a recommended sentence of at least 10 years in a federal prison.

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The other three defendants charged in the complaint are Todd Newman, Jon Horvath and Danny Kuo, but while they allegedly passed information to hedge funds that also traded in Dell, they do not appear to have any connection to Mr. Chiasson. And their total profits were less than $5 million, according to the complaint, almost a drop in the bucket compared with what Level Global is accused of realizing.

Unlike Mr. Rajaratnam’s case, which involved multiple sources of inside information, the charges against Mr. Chiasson focus only on trading in Dell with inside information about its earnings in 2008 that he is accused of receiving from a person who worked at the company. The charges say Level Global made approximately $4 million on Dell shares and call options bought shortly before the second-quarter earnings announcement in June, and then about $53 million by shorting the stock and buying put options before a negative earnings disclosure in August.

To make the case against Mr. Chiasson, prosecutors struck deals with three men who entered guilty pleas and are cooperating in the hope of receiving reduced sentences: Sandeep Goyal, who once worked at Dell; Jesse Tortora, a hedge fund analyst in Stamford, Conn.;p and Spyridon Adondakis, an analyst at Level Global. According to the complaint, Mr. Goyal passed the earnings information to Mr. Tortora, who in turn gave it Mr. Adondakis, who then told Mr. Chiasson that he had a source inside Dell supplying the information.

An important difference between the prosecution of Mr. Chiasson and Mr. Rajaratnam is that wiretaps did not play a role in the investigation, and there does not appear to be any contemporaneous recordings of the participants passing along information or discussing the trading. The prosecution appears to rests largely on the testimony of Mr. Adondakis about what he told Mr. Chiasson about his source, and any circumstantial evidence regarding the reason why Level Global traded in Dell, especially its large short position.

There are significant hurdles prosecutors will have to overcome to prove the charges described in the complaint against Mr. Chiasson. The information was passed down a chain from the person inside Dell to Mr. Goyal to Mr. Tortora to Mr. Adondakis, who then provided it Mr. Chiasson.

When an insider trading case is brought against someone, the government must prove the person knew that it was material nonpublic information that had been disclosed in breach of a fiduciary duty to the source. It may be difficult to show Mr. Chiasson, who was the end of a long chain, had the requisite knowledge of the fiduciary duty owed by the original source of the information to Dell. Much like the telephone game played in grade school, tracing information through multiple sources often means something can be lost along the way, such as the fact that this was purportedly confidential information from an insider and not just a rumor circulating in the market.

As a cooperating witness, Mr. Adondakis, as well as Mr. Goyal and Mr. Tortora, will be subject to strong cross-examination because of their deals with the government for leniency. A crucial question will be whether the government can muster additional evidence to show Mr. Chiasson knew the information was confidential and provided in breach of a fiduciary duty. The case may well come down to whether the jury believes Mr. Adondakis about how much he said about the source of his information at Dell.

A criminal complaint is often just curtain-raiser for the government, outlining a limited array of charges as a way to get the ball rolling and put pressure on the defendants to consider cooperating or face more charges. Prosecutors usually seek a grand jury indictment that includes additional charges as the next step in the case, much like in the prosecution of Mr. Rajaratnam, who was arrested in October 2009 and then indicted two months later on more counts.

The complaint includes a hint that there were additional sources of inside information that could be the basis of new charges. It states that Mr. Horvath and Mr. Kuo passed on to Mr. Adondakis information “from employees at one or more publicly traded technology companies.” It does not say whether there was any trading by Level Global in their shares, but that is certainly a possible avenue for additional charges against Mr. Chiasson.

The Justice Department and S.E.C. complaints also do not identify the font of information inside Dell, only stating that he (or she) worked in the investor relations department and was a friend of Mr. Goyal’s who once “received career advice from Goyal.” The government is likely to pursue charges against this person in the near future, if it has not already reached a plea agreement.

By arresting four defendants and reaching plea agreements with three others, the Justice Department has sent yet another message about how seriously it intends to pursue insider trading cases. The case against Mr. Chiasson, however, will put prosecutors to the test by requiring them to show how that information passed through multiple layers remained confidential.


U.S. v. Newman, Chiasson, Horvath and Kuo

Correction: January 19, 2012
A previous version of this post misspelled the surname of the former hedge fund manager convicted in 2010 of insider trading. It is Raj Rajaratnam.