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. The Securities and Exchange Commission said the conspiracy earned more than $30 million in illegal profits.
"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. One of the four told investigators he even destroyed computer drives and scattered the pieces in several garbage trucks.
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-based 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. Authorities said the men carried out their conspiracy from 2006 to 2010.
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.
Longueuil was released on a $1.5 million bond signed by his mother and fiancee during a brief court appearance where he didn't enter a plea or speak. Barai was released on $1 million bail.
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 charged in the case last year.
Jiau, 43, who was brought to New York from California, made her first court appearance in Manhattan on Tuesday. She was ordered held without bail after prosecutors argued in court papers that as a U.S. citizen born in Taiwan, she "has significant, long-term and ongoing ties to Taiwan."
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 instant messages 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.
Fedarcyk said at a news conference that the messages were important evidence.
"For all their presumed sophistication, they lacked a mobster's better-honed instincts for conversational discretion," Fedarcyk said.
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 "chopped up" the flash drive and two external drives with pliers before putting the pieces in plastic bags and tossing them in four different garbage trucks during a 2 a.m., 20-block walk around the city.
"On this account, Longueuil certainly seems to have been scrupulously if incriminatingly truthful," Fedarcyk said. "FBI video surveillance tape corroborates his own story of the clandestine late-night disposal of evidence."
Around the same time, investigators say instant messages show Barai instructed Pflaum to give him a laptop so he could do a "department of defense delete" on it - a reference to deletions that can't be restored.
Said Bharara: "Generally speaking, when people begin frantically shredding documents and deleting computer files and smashing flash drives and chasing garbage trucks at two in the morning, it's not because they have been operating legitimately - it's because they have broken the law."