Preet Bharara, the United States Attorney for the Southern District of New York, and Janice K. Fedarcyk, the Assistant Director in Charge of the New York Office of the Federal Bureau of Investigation (“FBI”), announced conspiracy and securities fraud charges against JOHN KINNUCAN, the President of Broadband Research, LLC, an investment research firm located in Portland, Oregon, for his alleged involvement in an insider trading scheme. KINNUCAN allegedly obtained material, non-public information (“Inside Information”) about publicly traded companies and sold that information to Broadband’s clients, including hedge funds and money managers (the “BBR Clients”). KINNUCAN understood that the Clients used such Inside Information to execute profitable securities trades. KINNUCAN was arrested late yesterday at his residence in Portland, Oregon, and is expected to be presented before Magistrate Judge John V. Acosta in the District of Oregon at 1:30 p.m. PST.
Manhattan U.S. Attorney Preet Bharara said: “As described in the complaint, John Kinnucan used financial incentives, fancy meals and other inducements to curry favor with public company insiders so they would serve up their employers’ secrets. He allegedly made a business model out of passing off those secrets to his hedge fund clients as legitimate research. If convicted, Kinnucan will join the scores of privileged professionals whose purported success has been unmasked as nothing more than a fraud.”
FBI Assistant Director in Charge Janice K. Fedarcyk said: “Kinnucan’s company, Broadband Research, was a misnomer. As the complaint alleges, the information he obtained and passed along to clients was not the result of research. It was inside information Kinnucan bought from company insiders. That kind of information beats research every time. The only problem is it isn’t legal.”
The following allegations are based on the complaint unsealed today in Manhattan federal court:
From 2008 through 2010, KINNUCAN obtained Inside Information, such as quarterly revenue numbers, from co-conspirators who were employed at publicly traded companies (the “Public Company Sources”), such as F5 Networks, Inc. (“F5”), Sandisk Corporation (“Sandisk”) and Flextronics International, Ltd. (“Flextronics”).
In order to develop and maintain a network of Public Company Sources, KINNUCAN befriended public company employees and offered to provide certain Public Company Sources with consulting fees and/or other non-monetary consideration. As outlined in the complaint, Kinnucan paid one of his sources approximately $27,500 for Inside Information, and invested $25,000 in the business of another source.
After he obtained Inside Information from Public Company Sources, KINNUCAN provided that Inside Information to BBR Clients understanding that they would use the information to execute securities transactions. For example, in June 2010 and early July 2010, KINNUCAN repeatedly sought information about F5’s quarterly financial results for the quarter ending on June 30, 2010 from an F5 employee. In a telephone call on July 2, 2010, at approximately 9:46 a.m., KINNUCAN informed the F5 employee that the revenue guidance F5 previously provided was $220 million. The F5 employee then told KINNUCAN that the unadjusted revenue number was “$232 million,” confirming that F5 would beat Wall Street’s consensus estimates. Within minutes of the July 2, 2010 conversation with the F5 employee, KINNUCAN called numerous BBR Clients to provide them with the F5 Inside Information. After receiving the F5 Inside Information from KINNUCAN, at least two BBR Clients executed securities transactions in F5 based, in whole or in part, on KINNUCAN’s Inside Information, earning profits and avoiding losses of more than $1.5 million.
In order to attract and retain BBR Clients, and in an effort to hide the true identity of his Public Company Sources, KINNUCAN lied to existing and prospective BBR Clients about the sources of his Inside Information, including by falsely stating that none of his sources was employed at a public company and that he did not pay his sources.
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KINNUCAN, 54, of Portland, Oregon, has been charged with one count of conspiracy to commit securities fraud (count one), one count of conspiracy to commit wire fraud (count two) and two counts of securities fraud (counts three and four). Count one carries a maximum potential penalty of five 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 20 years in prison and a fine of $250,000 or twice the gross gain or loss from the offense; and counts three and four each carry a maximum potential penalty of 20 years in prison and a maximum fine of $5 million.
Mr. Bharara praised the investigative work of the FBI. He also thanked the U.S. Securities and Exchange Commission. Mr. Bharara noted that the investigation is continuing.
This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which Mr. Bharara serves as a co-chair of the Securities and Commodities Fraud Working Group. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Avi Weitzman and Katherine R. Goldstein are in charge of the prosecution.
The charges contained in the complaint are merely accusations, and the defendant is presumed innocent unless and until proven guilty.
(Press Release by U.S. Attorney’s Office Southern District of New York)
