The United States government has accused Robert Moffat, IBMâs server chief, the guy who was negotiating to buy Sun, with betraying Sunâs financial position to Danielle Chiesi, an employee of New Castle Partners, a New York hedge fund, so she could trade on the insider information.
Moffat knew what Sunâs numbers were going to be because he was one of the nine IBMers doing due diligence at Sun this past January.
In a wire-tapped phone call Chiesi made to an unidentified person now cooperating with the governmentâs investigation she said, âIBM is looking at it as a takeover. The only reason my guy would know that is because itâs his deal. Like, heâs in bed with themâ¦.You see what I meanâ¦not because heâs just speculating.â
The news that IBM was negotiating to buy Sun didnât leak to the Wall Street Journal and hence to the world for another two months.
Armed with the foreknowledge allegedly provided by Moffat that Sun was going to beat the Street â top and bottom â when it reported its December â08 quarter, New Castle bought Sun shares just hours before Sun posted its numbers on January 27 and made a $900,000 killing on the deal.
The government says Moffat had practice slipping Chiesi insider financial information. When the global economy started melting down last year, he had dinner with her in early September, before IBMâs quarter closed, and reassured her that IBM would pull it out. According to a taped phone call with an unidentified affiliate of New Castle, she said, âHeâs saying, you know, [IBMâs] zSeries looks really good. Heâs saying that everything looks fine butâ¦it comes down to theâ¦final last week. But he thinks right now that they are on track. As of right now heâs not even worried a little bit, I mean, we think we can beat the numbers this quarter.â Chiesi apparently held onto her position in IBMâs stock.
Then again this past January, when IBM was due to report the results of its December quarter and Chiesi had spoken with Moffat New Castle covered a short position in IBM stock and began picking up more shares.
The government tap found her explaining to the person whoâs now a government witness, âIâm buying IBM going into the print,â Wall Street parlance for IBM posting its numbers. âIf I wasnât closer to the situation Iâd be, I would so short this fucking thing. But Iâm thinking they could beat, and they really could guide upâ¦.You know, my guy said easily they could, they could add 30 cents to the bottom line. Easily, easily. Thatâs what he says, to the bottom line in â09â¦.I donât think anybody is talking about a beat this quarter.â
The governmentâs complaint notes that on January 20 IBMâs Q4 earnings beat analyst expectations by 25 cents and that it expected to do 27 cents better this year than last.
The FBI figures New Castle was up about $500,000 on Moffatâs information.
Three months later Chiesi flat out asked Moffat what IBMâs quarter looked like. She was apparently told the company would miss on revenues by 7%, âmiss the short-term signings but make total signingsâ and earnings per share would be âgood,â which is exactly what happened on April 20.
Having made money on Sunâs financial results once, Chiesi got her âass kicked,â sheâs reported saying, on Sun stock when Oracle unexpectedly waltzed in with a $9.50-a-share bid to acquire the company on April 20, supporting the widely held perception that IBM was dumbfounded at the move.
Chiesi was short the stock allegedly because Moffat had told her Sunâs revenues would be down 27% when it reported its March quarter. The Street only estimated it would be down 17%. She was also gambling on Moffat telling her if IBM was going to buy Sun. She hadnât reckoned on Oracle or Moffat not knowing what was going on.
Moffat is charged with three counts of conspiracy to commit securities fraud, one each for Sun and IBM and the third for AMD, where Moffat in his capacity as head of IBM Microelectronics was in on AMDâs negotiations to spin off its factories into a joint venture with the government of Abu Dhabi. IBM would have to license the venture some of its technology.
In the AMD case they seem to have proven inept conspirators and Chiesi even had a pipeline into AMD in the form of a chatty unidentified AMD executive who apparently hasnât been charged with any crime. For all the reported discussions between Moffat and Chiesi of the dealâs structure, terms, voting rights, dilution, government approvals, management and timing of the announcement, the government thinks New Castle didnât profit from its trades in AMD stock âdue in part to a global financial crisis that precipitated a broad decline in stock markets in or about September and October 2008.â
New Castle had bought a swat of AMD at $5.44 and another at $4.50 pre-announcement and didnât begin selling until the price had sunk to $4.25. However, the governmentâs not sure that New Castle didnât avoid certain losses by selling put options the day before the announcement, which the hedge fund knew was set for October 7, 2008.
The FBI says Chiesi had been worried that she âwould make so much money that her trading might the attention of regulatorsâ so maybe she was relieved in a way.
By her own admission she would never have dabbled in AMD stock without having an inside track. She told New Castle president Mark Kurland that âUnless you were on the phone with [the AMD executive] and had Moffat at you house last night, who the fuck would be buying it honestly.â And to the alleged kingpin of the scheme, billionaire hedge fund manager Raj Rajaratnam, now out on $100 million bail, she was overheard to say she âwouldnât of touched [AMDâs stock] with a fucking 10-foot poleâ if she âwasnât close to the company.â
According to the US Attorney Moffat is looking at doing five years in jail and paying a fine of $250,000 or twice his gross gain or loss. His playmates are looking at worse.
Itâs unclear from either of the two complaints that the government filed with the federal court in New York Friday how exactly Moffat was to benefit financially from the intrigue.
He was the only one of the six people in the ring charged Friday to turn himself in. They went and arrested the others. Itâs unclear whether heâs still working for IBM, the company not being exactly forthcoming right now. His bio had disappeared from IBMâs site by early Saturday morning. IBM executives, by the way, are supposed to be well-compensated.
