An executive of a California research firm was arrested Wednesday on securities fraud and conspiracy charges after U.S. prosecutors accused him of arranging for inside information to be leaked to hedge funds, the latest development in an investigation of the industry.
The arrest of Don Ching Trang Chu of Primary Global Research stems from wiretaps and the cooperation of Richard Choo-Beng Lee, a hedge fund manager who pleaded guilty last year as part of the insider-trading prosecution of Galleon Group hedge fund founder Raj Rajaratnam and 22 other traders, lawyers and executives.
Chu, 56, also known as Don Chu, was accused in a criminal complaint in U.S. District Court in New York of introducing hedge funds to corporate executives who gave them insider trading information.
The government scored a victory in the Galleon case on Wednesday when a judge ruled that telephone conversations of Rajaratnam’s secretly recorded by the FBI were admissible at his trial. Rajaratnam has pleaded not guilty to charges of conspiracy and securities fraud and is scheduled to go on trial Jan. 17.
Prosecutors have described the Galleon case as the biggest investigation of insider trading at hedge funds in the United States. The probe has widened to include subpoenas of several funds with billions of dollars under management.
In subpoenas served on SAC Capital Advisors and other hedge funds and mutual funds, authorities have asked for information about so-called “soft dollar” deals, an arrangement in which a hedge fund client executes trades through a designated brokerage that has a relationship with an expert networking firm such as Primary Global.
Expert networking firms take fees to match up hedge funds with experts in particular industries such as medicine, engineering and technology.
The investigation widened Monday when FBI agents used search warrants to raid three hedge funds in Connecticut and Massachusetts.
Lee once worked for SAC Capital. There is nothing in Wednesday’s complaint accusing SAC Capital of any wrongdoing. A spokesman for SAC declined to comment.
Authorities are looking at funds established by former associates of SAC founder Steven Cohen, according to lawyers and people familiar with the investigation.
A spokesman for Primary Global Research said in a statement that “based upon recent events, PGR has severed its relationship with Mr. Chu.”
The statement said that Chu as the firm’s liaison in Taiwan and that he had been with PGR for seven years.
Chu, of Somerset, N.J., made a brief appearance before a magistrate judge in New York and was released on a bond of $1 million. Chu was not asked to enter a plea to the charges, and both of his lawyers declined to comment.
The office of Manhattan federal prosecutor Preet Bharara said Chu had been scheduled to leave the U.S. for Taiwan Nov. 28. His lawyers said Chu had planned to visit family. The court was told that Chu had surrendered his U.S. passport and agreed to surrender an expired passport issued by Taiwan.
Prosecutors said Chu had arranged for hedge funds to receive confidential information on companies including Atheros Communications Inc., Broadcom Corp. and Sierra Wireless Inc.
Sierra Wireless said in a statement that it intended to cooperate with prosecutors.
Telephone calls between Lee and Chu from July 14 to Aug. 28 of last year were recorded by the FBI, according to the criminal complaint. It does not identify the brokerage that hedge funds were directed to by Primary Global.
However, Primary Global owns a San Francisco-based brokerage called PGR Securities. A company representative declined to comment. The brokerage’s registration statement does not show previous regulatory infractions.
Prosecutors claim that in 2008 and 2009. Lee struck up a relationship with Chu while Lee was working at Spherix Capital, a now-closed San Francisco fund that Lee managed with Ali Far.
Lee and Far have pleaded guilty to trading on inside information in the Galleon case and are cooperating.
Far worked at Galleon for many years. Lee is a former trader and analyst at SAC.
As part of his cooperation agreement, Lee agreed to tell prosecutors of any insider trading he engaged in at SAC, which he left more than six years ago.
Lee’s lawyer, Jeff Bornstein, said: “My client is and continues to be cooperating to the best of his ability with the U.S. attorney and the FBI. Beyond that I don’t have a comment on the specifics.”
