Karl Motey: The Government’s Secret Weapon in Insider-Trading Arrests.

[setravis]

Deal Journal
An up-to-the-minute take on deals and deal makers.
December 20, 2010, 12:16 PM ET.
By Shira Ovide

The veil has lifted a bit more on the four men arrested and charged last week in the government's crackdown on insider trading. Karl Motey, a former semiconductor analyst for Wachovia and other Wall Street firms, was identified by Deal Journal colleague Susan Pulliam as one of the government's formerly anonymous crucial helpers.

Pulliam reported Motley–-previously identified only as "cooperating witness 2" in a court filing–made more than 60 phone calls to help the government in its widening investigation. The legal complaint last week showed how much the feds relied on Motey to nab expert-network official James Fleishman, and to elicit recorded secrets about Marvell, Apple and AMD, among other technology companies.

Motey now runs a research firm called Coda Group, a small California firm that offers research services about technology companies. As an analyst at Wachovia and other firms, Motey covered the semiconductor industry, including Conexant, Broadcom, Vitesse Seminconductor and Marvell–one of the companies for which he arranged sting phone conversations as part of the insider-trading case.

In 2005, Motey was among The Wall Street Journal's top-rated semiconductor analysts thanks in part to his buy ratings on Silicon Image Inc. and, yes, Marvell.

He joined Wachovia predecessor First Union in 2001 as a semiconductor analyst, and worked in the firm's San Francisco office. Motey previously covered semiconductors for C. E. Unterberg Towbin and at Deutsche Bank Alex. Brown. He graduated from the University of Massachusetts.

"Karl's presence in this space will bolster our growing communications equipment franchise and extend our existing semiconductor research efforts," Anthony Gallo, national director of research for First Union Securities, was quoted as part of a 2001 news release when he was hired at First Union. "We are excited to have Karl join our team."

Among the five cooperating witnesses described in the latest crackdown on insider trading, we now know the identity of three: Motey, former hedge-fund manager Richard Choo-Beng Lee–-who pleaded guilty to securities fraud last year as part of the Galleon Group investigation–and former Dell Inc. global supply manager Daniel DeVore. The other two cooperating witnesses are described as a Primary Global "vertical manager" and a hedge-fund analyst.

Previously, Motey has only been described by the government as "an individual who had substantial experience evaluating public companies in the semiconductor and technology industries, including their financial condition." The government said information provided by "CW-2" has "proven to be reliable" and has been corroborated by recorded phone calls.

It was Motey who got Fleishman, the Primary Global sales manager, to explain how the expert-network firm's investor clients are "more focused on the quarterly trends" than on general long-term trends–in theory what the expert-network firms are supposed to being paying for. According to the legal complaint, Fleishman told Motley that Primary Global didn't give out consultants' last name as "a sales point."

"That's just to protect them from investor relations or whatever it is?" Motey pressed Fleishman. "Yeah," Fleishman said.

Under the direction of the FBI, Motey made connections with Primary Global officials and, as a purported client, received information from Primary Global's consultants. Motey was the point person who got corporate secrets and quarterly sales information about Apple and AMD, according to the government complaint. The phone calls involving Motey were "routed through the FBI's recording facility" in New York, according to the government case against the men charged last week.

The government has said "CW-2"-–Motey–has pleaded guilty to securities fraud and conspiracy as part of a cooperation agreement with the government. The feds said he is cooperating "in the hope of receiving a reduced sentence."

[setravis]

December 16, 2010, 2:59 PM ET.
Apple iPad: Secrets from the Insider Trading Case.

By Shira Ovide
Apple Inc. is a major actor in one of the most intriguing sections of the government's 39-page complaint against four men arrested and charged in a massive sting of insider trading.

Secrets about tech companies are a major feature of the insider trading charges unveiled so far. Companies including AMD, Dell, Research in Motion, Marvell, Western Digital, Taiwan Semiconductor, Sierra Wireless and Broadcom allegedly had secrets leaked about them — including revenue and sales forecasts.

The alleged secrets passed about Apple products and product sales came courtesy of a business development official at Flextronics, Walter Shimoon, according to the government's legal complaint released today. The government said Flextronics had business dealings with Apple, including supplying parts such as the camera and charger components for the iPhone and iPod.

Shimoon, according to the insider-trading charges, gave an unnamed government witness a secretive chat about a brand new Apple device in the works. The conversation took place in Oct 2009, nearly four months before the introduction of the iPad.

"They [Apple] have a code name for something new...It's, it's totally...it's a new category altogether. And, uh, I speculate, it doesn't have a camera in it, what I figured out. So I speculated that it's probably a reader...Something like that...I believe it's called...K48. That's the internal name...So you can get, at Apple you can get fired for saying K48...That's how crazy they are about it."

The always active Apple blogs and rumor mills had been whispering the name K48 since at least early 2009 as a code name for a new device like a very large iPod touch.

In the same October phone call, Shimoon told the unnamed government informant that Apple also was working on a new iPhone that would come out early in 2010, and would have two cameras. Pressed about the timing of the new iPhone, Shimoon said:

"I was being asked the same question by my boss this morning....They [Apple], you know, they're very secretive, right? ...so I don't have [an] exact time frame but I've concluded we'll start building modules probably in March. ...So probably sometime in May, um, they'll have a big, you know, big launch."

Apple introduced the iPhone 4 – a model with two cameras, including a front-facing camera, in June 2010 –- eight months after the phone call with Shimoon.

The government also says Shimoon provided about information about Apple sales figures for the iPhone for the third quarter of 2009, and sales forecasts for the iPhone and iPod for the fourth quarter of 2009.

The complaint against him also says Shimoon even advised another Flextronics employee not to disclose too much information to a customer about Flextronics working for Apple, which Shimoon described as closely guarded.

Here's the exchange:

Unnamed Flextronics employee: "If they ask me what kind of business, I can't tell them well, we are supplying some camera modules to them [Apple]"

Shimoon: "We shouldn't. No, don't say that."

Flextronics employee: "So Apple is very concerned with other companies knowing who their vendors are? Is that basically the bottom line?"

Shimoon: "Bottom line. Yeah."

[setravis]

December 16, 2010, 1:46 PM ET.
The Cringe Worthy Moment of the Insider Trading Case.

By Shira Ovide
The government case against four men arrested in the widening probe of insider trading, just landed a candidate for cringe-worthy moment of 2010.

Walter Shimoon, the Flextronics employee charged with passing secrets about Apple, was caught talking about the insider-trading case against Galleon Group with an unnamed employee of Primary Global Research, the expert-network firm that has been roped into the insider trading case.

In the November 2009 phone call, intercepted by the feds, the Primary Global employee and Shimoon were talking about his work as a consultant advising hedge funds and other investors, according to the criminal complaint.

Primary Global employee: "If you think maybe you, um, you shouldn't be talking about it — don't. Or maybe give vague answers..."

Shimoon: "Well, no that's good and also this is all done over, it's all done via voice, there's no real record of information."

Primary Global employee: "Yeah, I mean we don't record, um, or monitor your call between you and our clients....it's sort of up to you to figure out when you talk to clients."

Shimoon: "That would really suck if you recorded all the calls."

[setravis]

December 16, 2010, 11:55 AM ET.
Here It Is: More Insider Trading Arrests.

By Shira Ovide
The Journal is reporting the government charged five more people as the massive federal investigation into insider trading kicks into a higher gear.

The government has been zeroing in on services of "expert network" firms — which connect investors with employees or experts about a particular company or industry. These are supposed to be informal chats about general trends, but last month the government charged one official from an expert network firm, Don Chu, with instead being a conduit for tips of secret financial information.

The new government arrests were of Walter Shimoon, Mark Anthony Longoria, Manosha Karunatilaka, and James Fleishman , the Journal is reporting. The are charged with wire fraud and conspiracy to commit wire fraud, according to the government complaint. A fifth person, Daniel Devore, a global supply manager at Dell, earlier pleaded guilty to wire fraud and conspiracy to commit wire fraud.

The arrested people include consultants and an employee of  Primary Global Research, the California expert-network firm that also had employed Chu.

The government said Shimoon was listed as a vice president of business
development at Flextronics and Longoria was listed as an employee with Advanced Micro Devices. Tips about AMD and other technology companies were part of the government case against Don Chu. The government said information about other technology firms, including Seagate, Flextronics, Marvell and Apple, was circulated by today's arrestees.

We'll have more as it comes in.

[setravis]

December 7, 2010, 4:06 PM ET.
SEC Nabs IT Manager for Insider Trading.

By Shira Ovide
The Securities and Exchange Commission today charged a former information technology manager at a law firm — and his brother-in-law — with insider trading.

The SEC says over the course of a year, Jeffery J. Temple tapped into secret information about mergers and used it to trade ahead of at least 22 deal announcements "involving 20 companies that retained his former employer as counsel in some capacity." Temple also tipped off his brother-in-law who made some of the same trades, the SEC said.

Some of the deals in which Temple traded were Google's deal for On2 Technologies, Disney's purchase of Marvel Entertainment, Xerox's purchase of Affiliated Computer Services, Airvana's takeover by SAC, and DynCorp's acquisition by Cerberus Capital, according to the SEC complaint.

READ THE SEC LAWSUIT HERE.
http://online.wsj.com/public/resources/documents/TempleSEC.pdf

The SEC says Temple and Benedict M. Pastro made more than $182,000 in illegal profits from the insider trading.The SEC didn't name the Delaware law firm at which Temple worked.

[setravis]

December 3, 2010, 10:03 AM ET.
Our Inside Tip Into Health-Care Insider Trading?

By Shira Ovide
Our Journal colleagues wrote today about several of the hedge funds roped into the government's massive insider-trading investigation also bought big doses of stock in health-care deals under examination by the feds.

Those deals include Wyeth's takeover by Pfizer, announced in 2009; MedImmune's acquisition by AstraZeneca and Schering-Plough takeover by Merck.

Ducking into the wayback machine, Deal Journal previously flagged some suspicious stock and options action in the run up to the Merck-Schering deal announced in March 9, 2009.

"A look at the charts shows that Schering-Plough's shares and options, which had been languishing for more than a year, had two recent spikes–one on Friday, Feb. 27 and another this past Friday. On March 6, Schering-Plough's shares rose 8%, mostly in late afternoon trading, while other drug company stocks jumped only around 3% to 4%. Merck rose 2.7%."...

Activity in options also picked up. According to this post citing numbers from Track Data, Schering-Plough's usual implied option volatility is around 55, but recently jumped to 88 for March options and 69 for April options. The higher number means that traders expect higher volatility; the fact that the March number was much higher means traders were betting a significant event would happen to Schering this month."

Read the rest of Deal Journal's prescient post here.
http://blogs.wsj.com/deals/2009/03/09/merck-schering-insider-trading-sec-should-take-a-look/