In recent days, the press has been filled with stories about an insider-trading task force that is poised to begin a round of high-profile arrests, indictments, and prosecutions of a wide swath of Wall Street players - alleged targets include hedge funds, mutual funds, broker-dealers, and a whole host of industry consultants and service providers. This morning, the first shoe seems to have dropped with the unsealing of a Criminal Complaint in Manhattan federal court - perhaps the first of many to come?

NOTE: The charges contained in the Complaint are merely accusations, and the defendants are presumed innocent unless and until proven guilty.

Don Chu Arrested

On November 24, 2010, Don Ching Trang Chu, a/k/a "Don Chu," was arrested on conspiracy charges in connection with his employment at an "expert-networking" firm (the "Firm"). Specifically, Chu was charged with conspiring to promote the Firm's consultation services by arranging for insiders at publicly-traded companies to provide material, nonpublic information ("Inside Information") to the Firm's hedge fund clients for the purpose of executing profitable securities transactions. Chu was scheduled to depart to Taiwan on November 28, 2010.

Chu, 56, of Somerset, New Jersey, has been charged with

  • conspiracy to commit securities fraud (Count One); and
  • conspiracy to commit wire fraud and fraud in connection with securities (Count Two).

Count One carries a maximum potential penalty of 5 years in prison and a fine of $250,000 or twice the gross gain or loss from the offense.

Count Two carries a maximum potential penalty of 25 years inprison and a fine of $250,000 or twice the gross gain or loss from the offense.

Primary Global Research LLC

NOTE: Although not identified in government pleadings, the Firm is reported in the press as "Primary Global Research LLC" of Mountainview, California.

The Firm's website provides this introductory description:

PGR's exclusive client base and gated network maximize the value of incremental information, giving institutional investors and analysts a strategic advantage when making investment decisions. Further, Primary Global Research is a broker-dealer with a trading desk.

During the research process, PGR's vertical managers work closely with clients not only to identify suitable experts and actionable data, but also to contribute ideas, perspective and strategy. Using PGR's multi-faceted approach, analysts can quickly capture and evaluate vital information to make well-informed, profitable decisions.

At http://www.pg-research.com/advisory-services.php

Chu's biography on the Firm's website states:

Don Chu, Asia Expert and Data Sources

Don Chu is PGR's bridge to Asia experts and data sources. Don was a 25-year veteran in Data Communications Industry. He was with Bell Labs for more than 10+ years in data, wireless, and telecommunications arena. He has great view of technologies sector in Taiwan and China from fab, fabless through OEM/ODM players. Don intimately understands the wireless broadband communications industry, and has deep connections and relationships in the technology industry. Finally, Don is just a fun person to travel with on the highways and byways of Taiwan.

At http://www.pg-research.com/includes/dchu_bio.php

The Firm: An Independent Investment Research Firm

The Firm's main office is located in California, but it maintains an office in, among other places, New York City. According to the Chu Complaint, the Firm advertised itself as an "independent investment research firm that provides institutional money managers and analysts with market intelligence," through a "Global Advisory Team of Experts."

The Firm advertised that its team of consultants "have real-world experience in industries such as healthcare, technology, media, telecommunications, retail, manufacturing, energy and aerospace."

The Firm stated that its consultants "speak one-on-one with [Firm] clients to provide up-to-the-minute intelligence on trends, issues, regulations and dynamics affecting a particular company, product or industry."

Consultants who become part of the Firm's expert network can earn hundreds of dollars per hour or per call from the Firm for their consultations with Firm clients. Firm clients, which include hedge funds, often pay the Firm tens of thousands of dollars annually for access to the Firm's consultant network and services.

The Firm and Chu's Employment

It is alleged that during the relevant time period, Chu was employed by the Firm and served as a liaison for the Firm to consultants and sources of information in the United States and elsewhere. Purportedly, Chu promoted the Firm's consultation services by arranging for Firm consultants to provide Inside Information regarding certain public companies' earnings releases for the purpose of executing profitable securities transactions. The disclosure of such Inside Information by these consultants would have been in violation of their fiduciary and other duties to their employers.

Choo-Beng Lee Relationship

In or about late 2008, Chu established a relationship with Richard Choo-Beng Lee, who at that time worked for a hedge fund. However, sometime during April 2009, Lee began to cooperate with the Government's investigation. Thereafter, Lee entered a guilty plea pursuant to a cooperation agreement with the Government to charges of conspiracy and securities fraud.

In late 2008 and early 2009, Lee's hedge fund was a client of the Firm. Lee's hedge fund's practice was to have its employees call a Firm consultant before the consultant's company was expected to release its quarterly earnings, in part to obtain Inside Information. Lee's hedge fund paid the Firm through soft dollars.

SOFT DOLLARSare payments that occur when a Firm client causes its trading activity to be directed through the Firm's designated broker-dealer, so that commissions or fees from the executed trading activity of the client satisfy the payment for the Firm's services.

A Confidential Informant Consults With Lee

On July 20 and 21, 2009, during the time when Lee was cooperating with the Government's investigation, Chu facilitated a consultation between Lee and an individual, who is described in the Complaint as a Confidential Informant ("CC-1″) who worked at a publicly-traded technology company (the "Tech Company"). During that consultation, CC-1 provided Lee with revenue numbers, average sales prices, unit sales for different product lines, gross margin figures, and revenue forecasts for the Tech Company. Later that day, the Tech Company announced its quarterly earnings.

Shortly after the Tech Company's public announcement, Lee called an employee at the Firm (the "Firm Employee") and told the Firm Employee about his conversation with CC-1. Lee said that CC-1's revenue number was "spot on." The Firm Employee said that CC-1 is one of the Firm's "more liked guys," and [referring to revenue numbers] said "that's what you try to get into." The Firm Employee said that CC-1 is "known as being fairly accurate."

Between January 2008 and March 2010, the Firm paid CC-1 more than $200,000 for consultation services that CC-1 provided. During that entire time, CC-1 was also employed by the Tech Company.

Chu Gets Nervous

On or about August 4, 2009, Chu met with Lee in person. During that meeting, Lee mentioned to Chu that Lee was surprised that CC-1, "gave me the number last quarter, it's like on the spot." Lee asked whether "you guys" were "nervous," and Chu replied, "I'm nervous." Later, Chu said, "Let me tell you the truth. That's why I don't want too (sic) involved in the States.. . . S.E.C. [the United States Securities and Exchange Commission] is too strong. In Asia, the S.E.C. can't do too much there."

Later, Chu explained a method of electronic communication to Lee that Chu believed could not be detected by law enforcement. Referring to that particular method, Chu stated, "There's no, no, no, no copy. If you, it's better than personal email. . . . There's no copy saved in the server. Even personal email, there is a copy. . . . So, [UI] just talk. Do, don't, don't put it down in writing. Dangerous."

The Broadcom Inside Information

On or about August 28, 2009, Chu spoke on the phone with Lee. During that call, Chu told Lee about another Firm consultant who worked at Broadcom (the "Broadcom Employee"), and who could provide "top line revenues" for Broadcom. Chu and Lee then discussed how Lee could contact the Broadcom Employee (who also worked as a Firm consultant).

On November 21, 2010, Chu spoke with FBI agents. Chu told the FBI agents that the Broadcom Employee "probably gave [a certain hedge fund manager] Broadcom's revenue numbers before Broadcom's quarter end because that is what [the Broadcom Employee] does. When you ask [the Broadcom Employee] for Broadcom's revenue numbers, [the Broadcom Employee] will give it to you."

UPDATE June 8, 2011

On June 7, 2011, Chu, 57, pled guilty to:

  • one count of conspiracy to commit securities fraud (Count One), and
  • one count of conspiracy to commit wire fraud (Count Two).

Count One carries a maximum sentence of five years in prison, and Count Two carries a maximum sentence of 20 years in prison. Chu also faces a maximum fine of $250,000, or twice the gross gain or loss from the offense on each conspiracy count. He agreed as part of his plea agreement to forfeit the proceeds he obtained as a result of the offense.
Chu is scheduled to be sentenced on September 7, 2011.