Whittier Trust manager among 4 arrested in insider trading probe
The arrest of a South Pasadena investment manager on insider trading charges extended the government’s sweeping investigation beyond Wall Street into a remote outpost of the investment world.
Danny Kuo, a technology expert at Whittier Trust Co., was taken into custody by FBI agents in the cold pre-dawn hours Wednesday at his two-story Spanish-style home in a residential neighborhood.
Unlike the dozens of high-level hedge fund managers who have been arrested in the government’s four-year crackdown on illicit trading, Kuo, 36, toiled at a mid-size 77-year-old firm that keeps a low profile and caters to rich families.
Whittier Trust has deep roots in Los Angeles history. It was founded to invest the money of the Whittier family, whose patriarch, Max Whittier, amassed a fortune through extensive oil and land holdings in Southern California.
Kuo’s arrest underscores the contention of prosecutors that insider trading has become “rampant and routine” beyond the white-shoe world of New York hedge funds.
“It shows the willingness of prosecutors to extend [their] reach well beyond the banks of the Hudson to nab participants who enable Wall Street insiders to unlawfully realize monstrous profits,” said Jacob Frenkel, a white-collar criminal defense attorney at Shulman Rogers in Rockville, Md.
Kuo and three other men arrested on the East Coast were part of what prosecutors called a “circle of friends who essentially formed a criminal club.” The complaint alleged they profited from trading on inside information about technology companies Dell and Nvidia.
Including losses that they avoided, the men made $78 million for themselves and their investment funds, according to a lawsuit filed Wednesday by the Securities and Exchange Commission.
Whereas the other defendants secured the services of sophisticated East Coast law firms, Kuo was represented by a public defender during his appearance in a Los Angeles federal court room on Wednesday.
Kuo appeared in court handcuffed, with disheveled hair and wearing a gray long-sleeve T-shirt.
“I don’t think he knew it was coming,” his lawyer, John Littrell, said of the arrest.
In court, Kuo gave one-word answers when questioned. Littrell told the judge that Kuo “is the last person named on the complaint because he is clearly the least culpable.”
He was released on $300,000 bail and is free until the next court appearance in New York before Jan. 25.
“Sometimes investigations move quickly and silently and they can catch somebody totally by surprise,” said Terree Bowers, a partner at Arent Fox in Los Angeles and a former U.S. attorney in Los Angeles.
Whittier Trust did not respond to calls for comment. Within hours of the arrest the company had taken down Kuo’s profile from its website.
The arrests are part of a sprawling insider trading investigation, dubbed Operation Perfect Hedge by federal agents, that has already resulted in 56 convictions, including that of hedge fund manager Raj Rajaratnam. Last year, Rajaratnam was sent to prison for 11 years, the longest ever sentence for insider trading.
“Each wave of charges seem to produce leads that lead us to the next wave,” said Janice Fedarcyk, the assistant director of the FBI’s New York office.
Along with Kuo, the other men arrested Wednesday were Anthony Chaisson, the co-founder of the New York hedge fund Level Global Investors; Todd Newman, a former portfolio manager at the Connecticut hedge fund Diamondback Capital Management; and Jon Horvath, a research analyst at Sigma Capital Management, which is affiliated with hedge fund management firm SAC Capital Advisors.
The government also unsealed charges Wednesday against Sandeep Goyal and two other investment firm employees who cooperated with the government.
The main conspiracy alleged by the government involved early tips about Dell’s financial results that were passed from a Dell employee to Goyal, who then worked at the New York investment firm Neuberger Berman Group. Goyal passed along the information to an intermediary, who relayed it to the men arrested.
Chaisson, the co-founder of Level Global, used the information to place bets on Dell stock that netted $57 million in 2008, the SEC said.
Kuo placed bets on Dell stock for a hedge fund run by Whittier Trust, leading to profits and avoided losses totaling $180,000, according to the SEC.
He allegedly also got inside information about Nvidia’s financial results from an employee at the technology firm, according to prosecutors. He is accused of passing the information to other defendants who used it to place trades before Nvidia reported earnings.
Prosecutors said the defendants were friends and business associates — most of them worked at a few financial firms in San Francisco earlier in their careers.
Kuo went to college at UC Berkeley and to business school at the University of Southern California. He had previously worked at Bear Stearns, JPMorgan and Merrill Lynch.
Level Global and Diamondback were raided by the FBI in 2010, and arrests of employees had been anticipated. Level Global shut its doors last year.
Diamondback, which is still operating, said in a letter to investors that both of the former employees charged Wednesday left the firm in 2010. The firm said it was “proactively assisting” prosecutors.
Lawyers for Chaisson and Horvath denied their clients had done anything wrong, and attorneys for the other men did not respond to requests for comment.
