CNET has obtained a copy of the FBI's complaint against four men who had access to vital trade secrets belonging to such tech companies as Apple, Dell, and AMD, and are accused of repeatedly violating securities laws by selling this information to hedge funds, according to the FBI.
As a result of a sophisticated sting operation that involved wiretaps and recorded phone conversations, FBI agents have arrested the four men on a score of charges that include securities fraud, wire fraud, and conspiracy.
The government's complaint, filed this week with U.S. District Court for the Southern District of New York, accuses the suspects of acquiring and selling a shocking amount of trade secrets involving Apple's iPad, iPhone, and iPod, as well as sales figures, sales projections, and revenue data for the other companies.
The government alleges that the case centered on Primary Global Research, a company that sold consulting services to investors about the tech industry. The government accuses James Fleishman, a exec at the Mountain View, Calif.-based company, of creating a reservoir of insider information by paying three men employed at top tech firms.
Those insiders allegedly are Walter Shimoon, (Flextronics International); Mark Anthony Longoria (Advanced Micro Devices) and Manosha Karunatilaka (U.S. division of Taiwan Semiconductor Manufacturing).
The operation was simple, according to a copy of the complaint against the men. Hedge fund managers paid big bucks to Fleishman to speak with the "consultants." According to the government's complaint, here's a sample of the kind of information--taken from recorded conversations--the hedge funds received for their money:
Later in the call [from an October 1, 2009 conversation] Shimoon told [cooperating witness from a hedge fund] that Apple was going to be producing a new iPhone...that would be "coming out early next year," and that the new iPhone "is gonna have two cameras." When Shimoon told [the cooperating witness] this information, [the cooperating witness] asked when the new iPhone was coming to market. Shimoon replied: "I was being asked the same question by my boss this morning. Um, cause we're working with them on the camera. They [Apple] you know, they're very secretive, right? So I don't have an exact time frame but I've concluded we'll start building modules probably in March. Um, so you give it one to two months, April, May. So probably sometime in May, um, they'll have a big you know big launch." Later in the call Shimoon explained, it'll be a neat phone cause it's going to have a five megapixel autofocus camera and it will have a VGA forward facing video conferencing camera.
Later in the call Shimoon told [the cooperating witness] about an Apple product in development "[Apple has] a code name for something new," Shimoon explained. It's totally...it's a new category altogether. And, uh, I speculate, it doesn't have a camera in it, what I figured out. So I speculated that it's probably a reader...something like that...I believe it's called K, K48. You can get fired for saying K48...outside of a meeting that doesn't have K48 people in it.
It's important to remember that the above conversation took place about eight months before the iPhone launched in June. Some of what Shimoon spoke about, was by that point being speculated about by the tech press but nothing was certain. And nothing was publicly known about K48, which was Apple's code name for the iPad, the computing tablet Apple launched in April.
The FBI also alleges that Shimoon provided a hedge fund employee with a sales forecast for the iPhone 4.
The FBI accuses Longoria of selling out his own employer. On July 21, 2009, the FBI alleges that Longoria, 44, told a cooperating witness, who at that time worked for a hedge fund, that he worked with AMD's processors and was privy to such information as forecasts, build plans, and original equipment manufacturers and boasted that he had "quite a bit of insight into how things are trending."
Longoria told the hedge fund employee that demand for AMD's products were strong and to prove it Longoria told the man he would "rattle off some numbers...because I have my report." The FBI alleges that Longoria provided the hedge fund employee with specific sales figures for sales of desktop PCs, notebooks, servers and embedded processors to the hedge fund employee. None of the information had been made public, the FBI said in its complaint.
Longoria also gave up revenue figures, according to the FBI. He allegedly told the hedge fund employee that he thought revenue for the then upcoming quarter would be $1.18 billion. The hedge fund employee allegedly asked if Longoria was confident in that number and Longoria responded: "Yes, I've got a buddy that works in finance that, uh, gives, uh, me all the nitty gritty details, probably more than I understand."
According to the Associated Press, a U.S. magistrate judge ordered Longoria released on $50,000 unsecured bond. Karunatilaka's bail was set at $250,000, and Shimoon has yet to appear before a judge. Daniel Devore, a former Dell employee, pleaded guilty December 10 to wire fraud and conspiracy charges.
The FBI showed that the defendants allegedly knew the kind of information exchange they were engaged in was unlawful. For example, Shimoon sent an e-mail in November 2009 to employees of Apple and those that worked at a specific Flextronics business unit.
"I am sending this e-mail as a gentle reminder to all of us that the [Flextronics business unit] and Apple are covered under both a nondisclosure agreement and [Master Development and Supply Agreement] This...will protect the work we have done with them up until now as well as the joint work we are doing with Apple...on process improvements for the [next generation] of iPhone."