The beauty queen, the hedge fund and the insider trading ring
November 24, 2009
By Anthony Effinger, Katherine Burton and Ian King
Danielle Chiesi spent a lot of time in hotel ballrooms and bars during the past decade. As an analyst at New Castle Funds, she was a regular at conferences on technology stocks, where she could get face time with executives and press them on how many microprocessors and how much software they were shipping that quarter.
Chiesi wore short skirts and low-cut tops, according to people who saw her over the years.
A blond, blue-eyed former teenage beauty queen, Chiesi used her sexuality to build sources at male-dominated technology companies, said Deborah Stapleton, president of Stapleton Communications.
"It amazes me that grown, wealthy, successful, hardworking men fell for that," Stapleton said. Chiesi was proud of her network, too. "She bragged about her contacts in public," Stapleton said.
US authorities say Chiesi, 44, crossed the line in her pursuit of secrets. They charged her and 19 others with securities fraud in the largest insider-trading case prosecuted since the 1980s, when stock market arbitrageur Ivan Boesky paid a $100 million fine and spent three years in prison.
Chiesi, they say, got tips from executives at technology companies and passed them along to other hedge fund managers, including Raj Rajaratnam, the billionaire co-founder of Galleon Group, who was also arrested in the case.
Rajaratnam, who is liquidating his hedge funds, has denied wrongdoing. Chiesi's lawyer, Alan Kaufman, said his client intended to plead innocent.
The one-time sorority sister at the University of Colorado is small fry compared with Rajaratnam, who managed $7 billion (R52.6bn at yesterday's exchange rate) in 2008.
High-level contacts
Of all the alleged conspirators, though, she had the highest-placed sources. She was in regular contact with Hector Ruiz, the former chairman and chief executive of Advanced Micro Devices (AMD), according to a person familiar with the investigation. Government prosecutors say she was friends with Robert Moffat, a senior vice-president of IBM, who was a candidate to succeed chief executive Sam Palmisano.
An unidentified family friend at Akamai Technologies allegedly gave her a tip so accurate that New Castle made more than $2.4m in one week.
The prosecution marks the first time the US government has tapped phones to get evidence against hedge funds, the lightly regulated partnerships that control $1.4 trillion. After two rounds of arrests, Preet Bharara, the US attorney for the southern district of New York, said he was just getting started.
"No one should assume that our aggressive policing of the hedge fund industry will stop at these two cases," Bharara said at a press conference after the second roundup.
Bharara's promise of a wider crackdown has hedge fund managers thinking twice about picking up the phone, according to an executive at one multibillion-dollar fund. And everyone is wondering whose conversations will spill into the public domain next.
The ones released so far show that Chiesi may have been the most aggressive of those charged when it came to pursuing tips and tipsters.
Her only competition is Zvi Goffer, 33, a former trader at Schottenfeld Group, known to some members of the ring as Octopussy, a nod to the 1983 James Bond movie starring Roger Moore, "because he had arms in so many sources of inside information", according to a November 5 complaint filed by the Securities and Exchange Commission (SEC), which is also pursuing the case.
While Chiesi may have had fewer sources, they were well placed, and she worked them hard. She made plans to meet with IBM's Moffat at her mother's house on a Sunday, government wiretaps show. She talked into the evening with Ruiz from AMD, and she sought to re-establish the trust of the family friend at Akamai so she could pump him for information.
Tarantino-like
Chiesi's comments on wiretaps read like dialogue from a Quentin Tarantino movie.
"Unless you were on the phone with (the AMD executive) and had Moffat at your house last night, who the f*** would be buying it, honestly?" she asked Mark Kurland, her boss at New Castle, about AMD on September 9, 2008.
Chiesi may have been breaking the rules for years.
Officials at Bear Stearns, which owned New Castle until January 2009, investigated Chiesi for insider trading at least once in the past five years, according to people familiar with the probe. They suspected Chiesi received non-public financial information from an executive at AMD. The investigation was inconclusive.
Kurland, the managing general partner at New Castle, encouraged Chiesi's source building, according to wiretaps. "This is what I think you should do more of, what you're doing more of now," Kurland, 60, who was also arrested, said on a phone call taped on August 22, 2008. "You know, get more relationships. Why don't you just worry about getting the information, and don't worry about the numbers?"
The source building paid off: New Castle made $3.8m in six months, starting in July 2008, using information gathered by Chiesi, the government says. And that's only on the trades detailed by the US Department of Justice.
For someone allegedly dealing in illegal secrets, Chiesi didn't care much about her cover. At conferences, she would brag in a loud voice that she could get AMD's Ruiz on the phone anytime, according to a person who heard her.
Beauty queen
Chiesi grew up in Binghamton, in New York state's Southern Tier along the Pennsylvania border. She was named Miss Southern Tier Teenager in 1981 and appeared in the local paper wearing a tiara. She enrolled at the University of Colorado at Boulder, where she rushed the Pi Beta Phi sorority.
"Danielle was really social, gregarious and popular," says Stacey Maggio, a sorority sister. "She was a knockout with a big heart."
Chiesi graduated in 1988 with a bachelor's degree in economics. She moved to New York, where she took a job at Mabon, Nugent & Company, a small brokerage. There, she got to know Kurland, then an analyst, according to a person who worked at Mabon at the time.
Chiesi bounced around after Mabon. But in 1996, she joined Kurland, who had started New Castle a year earlier with another Mabon alumnus. The same year, Chiesi divorced her husband, Brian Feeney, after a 16-month marriage.
Kurland was the head of research at the brokerage division of Bear Stearns before starting New Castle.
As a technology analyst at New Castle, Chiesi spent much of her time visiting companies and contacts on the West Coast, according to former Bear Stearns employees. One of those contacts, said a person familiar with the matter, had been Ruiz, 63, the former chief executive of AMD, Intel's smaller competitor in the microprocessor market.
Ruiz, who has not been charged with any wrongdoing and who declined to comment through a spokesman, isn't a child of privilege like Chiesi. A Mexican immigrant, he walked 45 minutes each way to high school in the south Texas town of Eagle Pass and graduated as valedictorian. He got a doctorate in engineering in 1973 from Rice University and worked at Motorola for 23 years.
He joined AMD in 2000 and succeeded founder Jerry Sanders as the chief executive two years later. Where Sanders was flashy, Ruiz was staid. "He's the quintessential engineer," says Robert Enderle, a technology analyst at Enderle Group in San Jose, California.
It isn't known when Ruiz and Chiesi met, when he started sharing information with her, or why. Chiesi's contact with someone at AMD prompted the Bear Stearns investigation of her trading, according to the people familiar with the probe. They say they didn't know the executive's identity.
While the investigation turned up nothing untoward, it did anger Kurland, the people say. Kurland suspected someone on Bear Stearns's trading desk, which bought and sold stocks for all of the internal funds, of raising concerns about Chiesi's sources.
He pushed even harder for his own trading desk, something that he had long wanted, the people say. He also tried to promote Chiesi to senior managing director several times in recent years, but each time Bear Stearns turned him down.
JPMorgan Chase, which bought Bear Stearns last year, declined to comment.
IBM 'coup'
Moffat, Chiesi's alleged source at IBM, was almost as valuable as Ruiz in terms of his clout. The 53-year-old senior vice-president ran the systems and technology group, which had sales of $19bn in 2008.
"He's a huge coup for me, having him at IBM," Chiesi said on a taped call with Rajaratnam in September 2008.
Chiesi met Rajaratnam at a conference about five years ago, according to a person familiar with the matter. They enjoyed the bull market together.
Prosecutors say they have been investigating the insider-trading case since at least November 2007. The FBI got permission from a judge to tap Rajaratnam's cellphone in March 2008, according to the government's complaint.
Agents started listening in time to hear Chiesi and Kurland make what was allegedly their biggest killing. Chiesi's contact at Akamai called her cellphone at 8.52pm on July 24 last year, a Thursday, and said the company, the largest supplier of software and services to make websites load faster, was going to lower its earnings forecast when it reported results the following Wednesday.
Chiesi hung up and called Kurland. Then she called Rajaratnam. "Akamai," she said. "I'm trading it tomorrow. They're gonna guide down. I just got a call from my guy."
The next morning, she called Steven Fortuna, 47, co-founder of hedge fund firm S2 Capital Management.
New Castle, Galleon and S2 all sold short Akamai shares. In a short sale, a trader borrows shares from an investor and sells them, hoping to buy them back at a lower price later, return the shares and keep the profit.
New Castle also bought put options, giving it the right to sell a fixed number of Akamai shares at a certain price. Like a short sale, a put option is a bet that prices will fall.
On Wednesday, July 30, after the market closed, Akamai cut its profit forecast. Akamai shares took their biggest-ever tumble the next day, dropping 25 percent.
New Castle covered its short position and sold its put options, making about $2.4m, according to the Justice Department. Galleon made $3.5m and S2 made $2.4m.
Fortuna pleaded guilty to securities fraud and is co-operating with the government.
New Castle also traded on AMD and IBM tips, the government says. The fund also made at least two more winning trades, on IBM and Sun Microsystems.
Turning fortunes
On January 8, 2009, Chiesi got two calls from Moffat's phone number, according to authorities. The next day, New Castle started buying IBM shares. On January 20, IBM reported earnings that beat analysts' forecasts. A day later, New Castle started dumping about half of its shares, making $500 000, the government says.
Moffat, a 31-year IBM veteran, allegedly helped with the Sun trade, too. He was on a team doing due diligence on the server-computer maker, which was up for sale, according to the Justice Department.
Talking with an unnamed associate in January, Chiesi said: "My IBM guy said that he thinks they're gonna beat the quarter." New Castle bought more than 1 million Sun shares on January 26 and 27, when Sun reported its earnings, which did exceed forecasts. The fund sold its Sun shares and reaped $900 000.
Ten months later, Chiesi's fortunes have turned. In photographs taken at FBI headquarters in Manhattan on October 16, her blond hair is cut short, she wears a baggy white sweater and she appears haggard.
Prosecutors have asked a judge to require Chiesi to undergo drug testing and treatment as a condition of bail.
The government's insider-trading investigation could widen further, but the probe is unlikely to find anyone who did the job with Chiesi's enthusiasm. - Bloomberg
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