The Wall Street Journal: January 31, 2011
Section C1-C3
By: Jenny Strasburg, Michael Rothfeld, and Susan Pulliam
A former Citigroup Inc. hedge-fund manager has been drawn into the government's insider-trading investigation as a co-conspirator in the case, and his firm has been raided by Federal Bureau of Investigation agents, according to people familiar with the matter.
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Samir Barai
The development broadens the known scope of a burgeoning criminal probe because it marks the first time a hedge-fund manager has been publicly revealed as a co-conspirator in the case. The investigation is examining whether hedge funds and other investors traded on inside information received from corporate employees freelancing as consultants for "expert-network" firms.
Mr. Barai made his name at Citigroup in a high-profile hedge-fund position and he used that affiliation to help market his own fund, according to people familiar with the firm. His role in the investigation involves conversations and trading that took place after Mr. Barai left Citigroup in 2007, and there is no indication the bank is implicated in the probe. A Citigroup spokeswoman declined to comment.
A criminal complaint filed in the case against an expert-network consultant said FBI agents raided the offices of an unnamed hedge fund, seizing recordings of telephone calls in which the fund's founder and a research analyst discussed inside information with the employee about technology companies including Marvell Technology Group Ltd. and Nvidia Corp.
The complaint, filed last month in a New York federal court, alleged that Winifred Jiau, a consultant for expert-network firm Primary Global Research LLC, provided inside information about publicly traded companies to hedge-fund managers.
The complaint also refers to a cooperating witness in the case, who is an analyst working for Mr. Barai, people familiar with the matter say.
"There were some individuals who CC-1 communicated directly with in order to receive inside information," including Ms. Jiau, according to the complaint. "CC-1 sometimes recorded CC-1's conversations with Jiau on a digital audio recorder…and/or had CW-1 listen in on the conversations so that CW-1 heard the inside information provided by Jiau."
Prosecutors said the hedge fund, identified by the people familiar with the matter as Barai, received more than $820,000 in May and June 2008 from trading ahead of Marvell's earnings based on inside information provided by Ms. Jiau.
The people familiar with the matter identified "CW-1," or a cooperating witness, as Jason Pflaum, a 38-year-old technology analyst at Barai Capital. The Jiau complaint says the analyst, who began working at the hedge fund at about March 2008, has entered a guilty plea on charges of conspiracy and securities fraud and has been cooperating in the government's investigation in hopes of a reduced sentence.
Mr. Pflaum didn't respond to requests for comment.
Two other Barai Capital employees—Jeffrey Wilkins, chief financial officer, and Michael Colman, a trader—declined to comment when reached at their homes last week. There is no indication that either Mr. Wilkins or Mr. Colman is involved in the case.
Fred Hafetz, a lawyer for Ms. Jiau, said his client "looks forward to her day in court." Primary Global declined to comment. A spokesman for Nvidia declined to comment. Marvell didn't respond to requests for comment.
The government's broadening insider-trading probe has resulted in criminal charges against eight employees or technology-industry consultants who worked for Primary Global Research, including Ms. Jiau, who was charged with conspiracy and securities fraud.
In November, the FBI conducted raids of hedge-fund firms Level Global Investors, Diamondback Capital Management and Loch Capital Management. The three firms have said they aren't targets of the insider-trading investigation. Diamondback and Level Global have said they are cooperating with authorities.
Ms. Jiau, 43, learned that at least some of the calls she made with Barai Capital were recorded, a person familiar with the matter says, but believed the reason was that Mr. Barai couldn't hear well.Mr. Barai has a severe, lifelong hearing impairment, and uses hearing aids and other technology to communicate, including while on telephone calls, according to people who know him. In an August 2008 profile for the magazine Absolute Return, Mr. Barai discussed having an electronic-hearing device, and using computers and other technology to help.
Mr. Barai launched his hedge fund in 2008 after leaving Citigroup's hedge-fund unit. At Citigroup, he ran a technology, media and telecommunications stock portfolio that produced strong returns for the bank's Tribeca hedge fund, says a person familiar with the matter.
Citigroup executives decided in 2007 to close Tribeca, which had produced mediocre investment returns overall and failed to attract money as expected.
Barai Capital itself never gained much traction with new investors. The firm managed less than $100 million in assets as of last fall, Mr. Barai told other hedge-fund managers and investors in October, when he spoke at an industry roundtable discussion in New York.
The fund has been profitable, however, Mr. Barai told his roundtable audience in October. Barai Capital achieved a cumulative total return of 13% over 2-1/2 years, he said, according to a transcript of the discussion from online hedge-fund news provider Opalesque.
In November, two agents dressed in street clothes flashed their FBI identification and announced their destination as Barai Capital for a video surveillance system at a Manhattan building, where the hedge fund was a tenant, said Augustus Tudzi, a security guard there.
"They just showed me the ID and said they were going to Barai Capital," he said. Mr. Tudzi said the agents arrived in the afternoon and that he hadn't seen them leave by the time his shift ended at 5 p.m. Sharon Adamo, the building manager, said she was also aware FBI agents had come to visit Barai Capital around November.
Building employees said that shortly after the FBI visit, Barai Capital left the offices, as had been earlier planned. It wasn't clear whether the fund has moved to another location or has shut down.
Voicemail boxes at numbers for Barai weren't accepting messages in recent days. An outgoing message said: "The office is closed for the holiday."
Opinion by Jon Worthey:
The Hollywood-hit sequel, Wall Street: Money Never Sleeps, revolves heavily around ethical decision making in the business world -- specifically insider trading. The head of a successful investment banking firm, Bretton James, is involved in an insider trading scheme that forces a competitor, Keller-Zabel, to go out of business. James’ board of directors forces his resignation once allegations surface about his role in sinking the competitor bank’s company. The Security and Exchange Commission (SEC) then intervenes by indicting James for insider trading leading to the demise of Keller-Zabel.
Though this film is fictionally-based, the ethical dilemmas featured are unfortunately real occurrences in today’s business world. As posted above, The Wall Street Journal published an article on January 31, 2011 in section C1 and continued in section C3 about an insider trading incident similar to the one portrayed in Wall Street: Money Never Sleeps.
The conspirator, Samir Barai, was a hedge-fund manager at Citigroup where “he used his affiliation to help market his own fund” until 2007 when he left Citigroup to start his own firm – Barai Capital Management (WSJ, C1-C3, 2011). The Federal Bureau of Investigation (FBI) “[seized] recordings of telephone calls in which [Barai] and a research analyst discussed inside information … about technology companies” (WSJ, C1-C3, 2011).
Insider trading is not only illegal, but it is also unethical. Aside from risking the possibility of being sentenced to time in federal prison, conspirators like Samir Barai lack the moral principles and judgment capabilities to resist the temptation of unethical and illegal business practice. This article can serve as a lesson to all current and future business employees; Barai acted unethically for years in his business decisions and those actions finally caused legal implications.
With such ethical dilemmas as the Martha Stewart insider trading scandal, Enron and numerous other companies producing false financial statements, and Bernie Madoff’s Ponzi scheme ravaging the business community during the past several years, the United States’ government reacted by implementing the Sarbanes-Oxley Act and other regulations, but these actions are not sufficient.
Though these types of illegal and unethical practices will never completely vanish, the public needs to understand that such behavior only adds to the recent economic conditions. Greed only allows the few to prosper while harming the finances of the many; greed will continue to confine the American society to the illegal and unethical business decisions as seen in Samir Barai’s situation.
Professionals need to take individual responsibility to make legal and ethical decisions in their everyday transactions; this sense of pride and awareness in business practice not only establishes fair business opportunities, but also encourages a trustworthy and positive business culture.
- Jon Worthey
Jon,
ReplyDeleteNice article. Last semester I completed FIL 242: Investments. It was interesting to learn about all the different types of investment vessels and strategies. I was surprised to learn that hedge funds have such a “long leash.” They are free to use speculative investment strategies and have limited oversight (in comparison to mutual funds). Hedge funds have the discretion to use options, forward contracts, futures, and short selling strategies at will. If a mutual fund used these tactics, there must be strict documentation and guidelines must be followed closely. However, this is not the case for hedge funds. In fact, investment policies of hedge funds are not required to be disclosed, even to investors in the fund. There are also very few rules on the pricing and valuation of these funds. This makes it hard to determine the fund’s actual worth and adds another level of “mystery” to hedge funds. All of this is allowed to happen in the wake of SOX 2002 and other legislation (As per Dr. Abhishek Varma’s lectures, notes, and textbook reading assignments).
I suppose I only have a few questions for you. What is the cause of all this? Are insider trading incidents, accounting scandals, and investment frauds the result of poor legislation or the lack of enforcement? Do you think the laws themselves are too lenient and filled with loopholes or do you think the laws are adequate yet poorly implemented? Does the government need to step in to protect investors or would this restrict free trade?
I agree with you, this type of bad publicity would cause a negative impact on any organization. Corruption at the top usually hinders performance at the bottom. If a leader is acting unethically, this establishes a horrible precedent. Insider trading and other scandals contribute to a company’s environment and definitely have an impact on organizational behavior.
Again, great job on finding this article and providing such a thorough interpretation. I look forward to following your posts.
-Jarek Palmer
To answer your posed questions, Jarek, I believe the cause of all the corruption and scandals is a combination of poor legislation as well as lack of enforcement. Since the Sarbanes-Oxley Act was passed in 2002, the government, BBB, and SEC's actions have increased tremendously when dealing with illegal and unethical business practice, but those attempts need to be further developed to prevent such incidents as the ones you listed above. Whistle blower protection laws currently in place have given the regulatory bodies governing the corporate world another method of reducing the illegal and unethical practices present in businesses. As those whistle blower protection rules are being changed to include a reward for whistle blowers that report malicious behavior, I believe more scandals like this one involving Samir Barai will continue to unfold. In the years prior to the mid-2000s, I believe illegal business practice was commonly overlooked by regulatory agencies because there were few situations that presented a red flag; now that our country familiar with such scandals as Enron and Bernie Madoff and we are slowly working our way out of this recession, there is absolutely no room for this type of unethical or illegal behavior in business -- nor was there room before today. Implementation and maintenance of laws uncovering illegal and unethical business practices will increase and become a more important task for the regulating agencies. Lastly, I completely agree with your assertion that this type of behavior influences organizational behavior, especially if such decision making is initiated by upper management. Ethics have become a staple of American corporate culture that need to be encouraged by everyone in an organization to ensure better business practice. Thank you for your stimulating comments -- check back soon for my next blog post.
ReplyDelete-Jon Worthey