On January 18, 2012, the Securities and Exchange Commission (SEC) charged two multi-billion dollar hedge fund advisory firms as well as seven fund managers and analysts involved in a $78 million insider trading scheme based on nonpublic information about Dell’s quarterly earnings.

Insider-trading is an illegal activity when a corporation’s stock or other securities are traded by individuals with special knowledge or access to non-public information about the company, giving them an unfair advantage over regular investors.  The SEC states that this case involves insider trading by members of a network closely associated hedge fund trades who illegally obtained material nonpublic information concerning public companies Dell, Inc and/or Nvidia Corporation, exchanged that information with others, and reaped massive profits from trading on that information.

Manhattan U.S Attorney, Preet Bharara, described the group of individuals involved as “a circle of friends who essentially formed a criminal club, whose purpose was profit and whose members regularly bartered lucrative inside information. It was a club where everyone scratched everyone else’s back.”  The Director of the SEC’s Division of Enforcement said in a statement that “These are not low-level employees succumbing to temptation by seizing a chance opportunity. These are sophisticated players who built a corrupt network to systematically and methodically obtain and exploit illegal inside information again and again at the expense of law-abiding investors and the integrity of the markets.”

The SEC alleges that during at least 2008, investment analyst Sandeep “Sandy” Goyal illegally obtained Dell quarterly earnings information and other performance data from an insider at Dell.  Goyal then tipped Diamondback Capital Management, LLC analyst Jesse Tortora with the inside information in advance of Dell’s first and second quarter earnings announcements in 2008, Tortora then tipped his portfolio manager at Diamondback, Todd Newman, then he traded on the information on behalf of the Diamondback hedge funds he controlled.  Tortora also tipped Spyridon “Sam” Adondakis, an analyst at Level Global Investors, L.P.  Adondakis tipped his manager Anthony Chiasson, who then traded on the inside information on behalf of Level Global hedge funds.  According to the SEC’s complaint, Tortora also tipped two others at firms other than Diamondback or Level Global with the Dell inside information: Jon Horvath of New York City and Danny Kuo of San Marino, Calif.  The SEC complaint further alleges that in addition to engaging in insider trading in Dell securities, at least five of the seven individual defendants and both investment adviser firm defendants obtained material nonpublic information concerning Nvidia, and traded on the basis of that information and/or passed the information on to other who traded.

The SEC’s investigation and complaint filed in federal court in Manhattan is part of an ongoing four-year old insider-trading probe named “Operation Perfect Hedge”, which so far has resulted in 63 arrests and 56 convictions.