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Conviction in US hedge fund insider trading case

Date: Wednesday, March 31, 2010
Author: Hedge Funds Review

Robert Moffat, Jr, a former senior executive at International Business Machines Corp (IBM) has pleaded guilty to two counts of insider trading and has been charged with conspiracy and securities fraud stemming from his involvement in the largest hedge fund insider trading case in history, according to Preet Bharara, US attorney for the Southern District of New York.

Moffat pleaded guilty in Manhattan federal court before US Magistrate Judge Frank Maas.

According to the information to which Moffat pleaded guilty, a complaint previously filed in this case, and statements made during today's guilty plea proceeding:

From August to October 2008 Moffat engaged in an insider trading scheme. Moffat obtained material, non-public information relating to IBM, Advanced Micro Devices, (AMD) and Lenovo Group and provided it to Danielle Chiesi, a friend who worked at the time as a consultant for Newcastle, an equity hedge fund group affiliated with JP Morgan Chase & Co.

The co-founder of New Castle Partners, Mark Kurland, was charged along with Galleon Group founder Raj Rajaratnam and others by the US Justice Department and the US Securities and Exchange Commission in October 2009 on trading using insider information.

New Castle Funds was founded by Kurland, Bob Reitzes and Scott Merves in 2008, spinning off the management of three funds and two managed accounts developed at Bear Stearns. As of August 30, 2009 New Castle, based in New York, had a total of $926 million assets under management.

Moffat provided the inside information to Chiesi who is no longer with New Castle Partners. She then used the information to execute illegally securities transactions.

In September 2008 Moffat provided Chiesi with inside information relating to IBM's and Lenovo's performance in the companies' fiscal quarters ending in September 2008. Moffat also provided Chiesi with inside information relating to a business deal in which AMD would spin off its manufacturing business into a separate entity. Moffat was involved in the deal because AMD needed a licence from IBM in order to use certain IBM technology.

On August 22, 2008, during a phone call intercepted by a government wiretap, Moffat provided Chiesi with information regarding the timing of the deal's announcement. In another phone call also tapped on September 22, 2008, Moffat told Chiesi AMD was going to "try to announce [the deal] by 10/10". On October 7, 2008 AMD announced the deal.

Chiesi traded in the securities of IBM and AMD on the basis of the information provided by Moffat in accounts affiliated with New Castle. New Castle did not realise a profit attributable to the inside information provided, in part because of the turmoil in the stock markets at the time in autumn 2008.

Moffat was charged with one count of conspiracy to commit securities fraud and one count of securities fraud. The conspiracy count carries a maximum sentence of five years in prison and a maximum fine of the greater of $250,000 or twice the gross gain or loss from the offence.

The securities fraud count carries a maximum sentence of 20 years in prison and a fine of $5 million.

Moffat is scheduled to be sentenced on July 26, 2010, by Judge Buchwald.