(AP) Federal authorities revealed charges Tuesday against three hedge fund portfolio managers and a hedge fund analyst, describing in court papers the panic that ensued when two of them thought they faced the scrutiny of investigators.
The two new arrests and the announcement of two guilty pleas expanded a federal crackdown on insider trading that masks itself as legitimate market research. The case raised the number charged in the probe to 12.
"Shred as much as u can," one of the men wrote to another in a string of electronic messages that were traded after they saw news reports describing U.S. Attorney Preet Bharara's assault on Wall Street insider trading, according to a criminal complaint filed in U.S. District Court in Manhattan.
Bharara on Tuesday promised more arrests, saying "we are far from finished."
The investigation was revealed in the fall and has so far concentrated on a group of hedge fund portfolio managers who authorities say tried to learn inside information about public companies through contacts at a California public research firm, Primary Global Research. The company boasted of its research results, but authorities say it sometimes specialized in linking corrupt employees of public companies willing to prematurely divulge earnings results or acquisition announcements with hedge fund managers eager for a trading edge.
FBI Assistant Director Janice K. Fedarcyk said the latest charges exposed the cynicism of what some call market research.
"When you are paying insiders for earnings data before it's announced, that isn't 'research.' That's cheating." she said.
In court papers, charges were outlined against Samir Barai, 38, who owned a New York-based hedge fund company that bears his name; Donald Longueuil, 34; Noah Freeman, 34; and Jason Pflaum, 37. Freeman and Longueuil were described as hedge fund portfolio managers while Pflaum was described as a research analyst. Freeman lived in Boston while the others reside in Manhattan.
A criminal complaint unsealed Tuesday said Pflaum has pleaded guilty to conspiracy and securities fraud in a cooperation deal that calls for him to receive a reduced sentence if he is helpful. Freeman has also pleaded guilty to conspiracy to commit securities fraud and wire fraud in a similar deal aimed at leniency.
In all, authorities say the men worked for six hedge funds and obtained and shared illegal secrets about at least six publicly traded companies to reap millions of dollars in illegal profits.
Bharara called the latest charges "a sad chronicle not only of criminal conduct but also its brazen cover-up." He added: "And the lengths to which two of these defendants went to cover their tracks sounds like something out a bad movie."
The FBI said in court papers that Barai and Longueuil were charged with obstruction of justice in addition to conspiracy to commit securities fraud and wire fraud, charges more routinely filed to describe insider trading crimes.
It said it based the obstruction charge in part on evidence it gathered after it seized a laptop computer used by Pflaum, files from Pflaum's desktop computer and an audio recorder that Barai used to record consensual telephone conversations with Winifred Jiau, a former Primary Global Research consultant already charged in the case.
According to the complaint, Barai and Longueuil in November tried to destroy digital records and documents reflecting their receipt of inside information from employees at public companies and their sharing of inside information with each other and Freeman.
The complaint said Barai sent Pflaum electronic communications including: "So what if we talked to anyone ... They need proof that we acted on something ... And its hard to have that ... The more I think about it - just not enough clues to hold something on us ... so we're ok." At another point, the FBI said Barai sent the following messages: "I think U just go into office ... shred as much as u can." At the time, the complaint said, Pflaum was already cooperating with authorities.
Prosecutors also said Longueuil heard news reports and then destroyed the flash drive on which he had logged his conversations with company insiders. The complaint said he later recounted to Freeman, who already was cooperating with investigators, how he destroyed the evidence.
The complaint said he described how he ripped the flash drive apart, put the pieces in four separate small plastic bags and walked 20 blocks, tossing them into four random garbage trucks.
It was not immediately clear who will represent Barai and Longueuil when they make initial court appearances in federal court in Manhattan on Tuesday.