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Government Charges Vocal Critic in Insider Trading Case


John Kinnucan was accused of swapping corporate secrets with hedge funds for cash.
Multnomah County Sheriff, via A.P.

By AZAM AHMED and BEN PROTESS
February 17, 2012, 8:48 pm

8:48 p.m. | Updated

Federal authorities on Friday charged one of the most vocal and vehement critics of their campaign to root out insider trading on Wall Street, accusing John Kinnucan, an Oregon-based research analyst, of swapping corporate secrets with hedge funds for cash.

The analyst, who drew attention last year for openly challenging the investigation, was arrested at his home on Thursday on allegations that he collected insider tips gleaned from executives at technology companies, including SanDisk [ http://dealbook.on.nytimes.com/public/overview?symbol=SNDK ]. To gather the information, the government claimed, Mr. Kinnucan lavished his sources with gifts that included ski trips, fancy meals and cash.

Mr. Kinnucan was paid about $30,000 a quarter by two hedge funds that traded on portions of the insider information, according to the government’s complaints. But unlike other cases that have implicated the hedge funds themselves, the complaints say that Mr. Kinnucan masked his efforts as legitimate research, assuring his clients that the information did not include illegally obtained insights.

“Kinnucan’s company, Broadband Research, was a misnomer,” said Janice K. Fedarcyk, the assistant director in charge of the Federal Bureau of Investigation [ http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_bureau_of_investigation/index.html ]. “It was inside information Kinnucan bought from company insiders. That kind of information beats research every time.”

It is the latest twist in one of the more bizarre chapters of the government’s yearslong investigation. Mr. Kinnucan is the most recent individual charged in the government’s inquiry, which has resulted in more than 60 arrests and convictions. The case stems from an inquiry into expert networks, organizations that connect business executives with investors interested in their companies and fields.

The criminal complaint contends that Mr. Kinnucan repeatedly tapped an inside source at the technology company F5 Networks [ http://dealbook.on.nytimes.com/public/overview?symbol=FFIV ]. Mr. Kinnucan also shared his beach house with the F5 source, according to the government.

On July 2, 2010, the source tipped Mr. Kinnucan about the company’s coming quarterly earnings, the government says. He promptly shared the information with his roster of hedge fund clients. The unnamed hedge funds located in California and Texas later bought shares in the company ahead of its public earnings announcement.

The Securities and Exchange Commission [ http://topics.nytimes.com/top/reference/timestopics/organizations/s/securities_and_exchange_commission/index.html ] filed a parallel action against Mr. Kinnucan on Friday, outlining the same sources and illicit information-sharing as the Justice Department.

“Obtaining important and unreported financial results from company insiders and selling that information to hedge funds is not legitimate expert networking services — it’s old-fashioned insider trading,” Robert Khuzami, the director of the S.E.C.’s division of enforcement, said in a statement.

Mr. Kinnucan’s lawyer, Gary Villanueva, declined to comment.

Bolstering the government’s case against Mr. Kinnucan are wiretaps, phone records, instant message conversations and cooperating witnesses.

One of those witnesses, Donald Barnetson, pleaded guilty Friday in the Federal District Court in Lower Manhattan. Mr. Barnetson, a senior director at SanDisk, is accused of passing to Mr. Kinnucan nonpublic information about the company’s negotiations with Apple. Mr. Kinnucan, the government has contended, invested in a start-up venture of Mr. Barnetson.

Another company embroiled in Mr. Kinnucan’s web is Flextronics, the government said. A senior employee at the firm admitted in a guilty plea last year to passing tips about the company to Mr. Kinnucan. Additionally, the government said Mr. Kinnucan received tips about OmniVision Technologies [ http://dealbook.on.nytimes.com/public/overview?symbol=OVTI ] from an inside source.

Federal agents first approached Mr. Kinnucan at his Portland, Ore., home in late 2010, asking him to cooperate with an investigation into several hedge fund clients. Mr. Kinnucan balked, then fired off an e-mail to warn his clients.

“Today two fresh-faced eager beavers from the F.B.I. showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information,” the e-mail said. “We obviously beg to differ, so have therefore declined the young gentleman’s gracious offer to wear a wire and therefore ensnare you in their devious web.”

In the months after the e-mail surfaced, Mr. Kinnucan granted dozens of interviews to the media, lambasting the government’s efforts while defending himself. As the case dragged on, his communications grew stranger. He fired off rants against the federal prosecutors investigating the matter — notes that included expletives and racial epithets. In a voicemail to a United States attorney, Mr. Kinnucan said, “Too bad Hitler’s not here. He’d know what to do with you,” according to a government motion to deny bail in the case. He also dared the government to arrest him.

In a commentary written for DealBook [ http://dealbook.nytimes.com/2010/11/29/why-i-chose-not-to-wear-a-wire/ (below)], Mr. Kinnucan described why he refused to cooperate with the authorities. He said that he was offended that the agents arrived at his home just before his wife and children were expected home from school. But he also said that cooperating would have violated his principles.

“I had to decide between committing a wrong — agreeing to try to entrap someone whom, based on our mutual dealings, I believe to be innocent — or standing up to fight for what I believe is right,” he said. “I chose the latter.”

As for his research, Mr. Kinnucan said there was nothing illegal about it.

“The type of research I provide to clients is pervasive in the financial community, the same kind of analysis provided not only by all investment banks, large and small, but by an ever-expanding group of research boutiques, virtually all larger than mine,” he wrote.

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U.S. v. John Kinnucan

[Scribd ( http://www.scribd.com/doc/81959619/U-S-v-John-Kinnucan ) embedded]

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S.E.C. v. John Kinnucan

[Scribd ( http://www.scribd.com/doc/81960076/S-E-C-v-John-Kinnucan ) embedded]

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Donald Barnetson criminal information

[Scribd ( http://www.scribd.com/doc/81964011/Donald-Barnetson-criminal-information ) embedded]

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Copyright 2012 The New York Times Company

http://dealbook.nytimes.com/2012/02/17/government-snares-a-vocal-critic-in-latest-insider-trading-charges/ [with comments]


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Why I Chose Not to Wear a Wire

By JOHN KINNUCAN
November 29, 2010, 2:36 pm

John Kinnucan is a principal at Broadband Research in Portland, Ore.

Many people seem truly astonished by my decision not to comply [ http://dealbook.nytimes.com/2010/11/23/analyst-explains-why-he-rebuffed-f-b-i/ ] with the Federal Bureau of Investigation’s request to wear a wiretap to record conversations with a client. I have even been asked, “Why not just agree to wear the wire to show that no wrongdoing had occurred?”

Unfortunately, that requires assuming that I was asked nicely to cooperate. That was not the nature of the proposal I was offered. (And had I agreed, I have no doubt I would have been asked to record conversations with others as well.)

A surprise visit by the F.B.I. to your home — especially when your wife and two young children are due to arrive from school at any moment — is a shocking, terrifying experience. It makes me wonder whether they deliberately chose this time of maximum vulnerability.

F.B.I. agents are backed by the full force of the federal government, and the ones who arrived at my home made it abundantly clear that they believe I am guilty, and therefore so are all of my clients, and they threatened to arrest me on the spot.

The notion that I could have quietly resolved this “little misunderstanding” by going along with their program is not quite realistic. And in many people’s eyes, by agreeing to this request I would have been implicitly admitting to wrongdoing.

I had to decide between committing a wrong — agreeing to try to entrap someone whom, based on our mutual dealings, I believe to be innocent — or standing up to fight for what I believe is right. I chose the latter.

The type of research I provide to clients is pervasive in the financial community, the same kind of analysis provided not only by all investment banks, large and small, but by an ever-expanding group of research boutiques, virtually all larger than mine. It is an insanely competitive business, and grows more so every day.

Research providers are constantly struggling with the question of what constitutes appropriate information for our clients. Most of the picture here is gray, with a thin margin of black and white on either side.

In deciding the propriety of our inputs, we look for cues in the marketplace. If major banks, whose compliance departments are presumably staffed with former Securities and Exchange Commission lawyers, regularly publish industry data like iPhone build and Dell motherboard production changes, the rest of us can reasonably conclude that this must have regulators’ blessing. Otherwise, why would it have been allowed to proceed unchecked for years?

The evident intent of the Justice Department to retroactively criminalize what has been common practice for years — done by investment banks, research providers and mutual and hedge funds alike — seems like a profound miscarriage of justice.

The S.E.C.’s proper role is to provide guidance and rules to the investment community on what is considered appropriate behavior. If the agency is doing its job, it will take note of untoward activities and issue a cease-and-desist order. But here, the rule-making appears to be decided by the Justice Department.

My personal belief is that much of this activity is politically motivated, and will ultimately only delay the return of the confidence of Main Street and Wall Street in our country. Our economy won’t fully heal and return to solid growth so long as the political class maintains its vendetta against business interests in our country.

This, along with my firm belief that my clients and I have done nothing wrong, is why I have chosen to take a stand. It’s about fighting for what I believe should be fair dealings between individual citizens and their government.

Copyright 2012 The New York Times Company

http://dealbook.nytimes.com/2010/11/29/why-i-chose-not-to-wear-a-wire/ [with comments]


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