United States Attorney
Southern District of New York
NOVEMBER 24, 2010 ELLEN DAVIS,
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 that DON CHING
TRANG CHU, a/k/a “Don Chu,” was arrested this morning on
conspiracy charges in connection with his employment at an
“expert-networking” firm (the “Firm”). CHU has been charged with
conspiring to promote the Firm’s consultation services by
arranging for insiders at publicly-traded companies to provide
material, nonpublic information (“Inside Information”) to the
Firm’s hedge fund clients for the purpose of executing profitable
securities transactions. CHU was scheduled to depart to Taiwan
on November 28, 2010.
According to the Complaint unsealed today in Manhattan
federal court:
The Firm and CHU’s Employment
During the relevant time period, CHU was employed by
the Firm and served as a liaison for the Firm to consultants and
sources of information in the United States and elsewhere. CHU
promoted the Firm’s consultation services by arranging for Firm
consultants to provide Inside Information regarding certain
public companies’ earnings releases for the purpose of executing
profitable securities transactions, where such Inside Information
had been disclosed by the Firm consultants in violation of their
fiduciary and other duties to their employers.
The Firm’s main office is located in California, but it
maintains an office in, among other places, New York, New York.
The Firm advertised itself as an “independent investment research
firm that provides institutional money managers and analysts with
market intelligence,” through a “Global Advisory Team of
Experts.” The Firm advertised that its team of consultants “have
real-world experience in industries such as healthcare,
technology, media, telecommunications, retail, manufacturing,
energy and aerospace.” The Firm stated that its consultants
“speak one-on-one with [Firm] clients to provide up-to-the-minute
intelligence on trends, issues, regulations and dynamics
affecting a particular company, product or industry.”
Consultants who become part of the Firm’s expert network can earn
hundreds of dollars per hour or per call from the Firm for their
consultations with Firm clients. Firm clients, which include
hedge funds, often pay the Firm tens of thousands of dollars
annually for access to the Firm’s consultant network and
services.
In or about late 2008, CHU established a relationship
with Richard Choo-Beng (“C.B.”) Lee, who at that time worked for
a hedge fund. (In or about April 2009, Lee began to cooperate
with the Government’s investigation, and he has since entered a
guilty plea pursuant to a cooperation agreement with the
Government to charges of conspiracy and securities fraud.) In
late 2008 and early 2009, Lee’s hedge fund was a client of the
Firm. Lee’s hedge fund’s practice was to have its employees call
a Firm consultant before the consultant’s company was expected to
release its quarterly earnings, in part to obtain Inside
Information. Lee’s hedge fund paid the Firm through soft
dollars, which are payments that occur when a Firm client causes
its trading activity to be directed through the Firm’s designated
broker-dealer, so that commissions or fees from the executed
trading activity of the client satisfy the payment for the Firm’s
services.
The Tech Company Inside Information
On July 20 and 21, 2009, during the time when Lee was
cooperating with the Government’s investigation, CHU facilitated
a consultation between Lee and an individual (“CC-1”) who worked
at a publicly-traded technology company (the “Tech Company”).
During that consultation, CC-1 provided Lee with revenue numbers,
average sales prices, unit sales for different product lines,
gross margin figures, and revenue forecasts for the Tech Company.
Later that day, the Tech Company announced its quarterly
earnings. Shortly after the Tech Company’s public announcement,
Lee called an employee at the Firm (the “Firm Employee”) and told
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the Firm Employee about Lee’s conversation with CC-1. Lee said
that CC-1’s revenue number was “spot on.” The Firm Employee said
that CC-1 is one of the Firm’s “more liked guys,” and [referring
to revenue numbers] said “that’s what you try to get into.” The
Firm Employee said that CC-1 is “known as being fairly accurate.”
Between January 2008 and March 2010, the Firm paid CC-1 more than
$200,000 for consultation services that CC-1 provided. During
that entire time, CC-1 was also employed by the Tech Company.
On or about August 4, 2009, CHU met with Lee in person.
During that meeting, Lee mentioned to CHU that Lee was surprised
that CC-1, “gave me the number last quarter, it’s like on the
spot.” Lee asked whether “you guys” were “nervous,” and CHU
replied, “I’m nervous.” Later, CHU said, “Let me tell you the
truth. That’s why I don’t want too (sic) involved in the States.
. . . S.E.C. [the United States Securities and Exchange
Commission] is too strong. In Asia, the S.E.C. can’t do too much
there.” Later, CHU explained a method of electronic
communication to Lee that CHU believed could not be detected by
law enforcement. Referring to that particular method, CHU
stated, “There’s no, no, no, no copy. If you, it’s better than
personal email. . . . There’s no copy saved in the server. Even
personal email, there is a copy. . . . So, [UI] just talk. Do,
don’t, don’t put it down in writing. Dangerous.”
The Broadcom Inside Information
On or about August 28, 2009, CHU spoke on the phone
with Lee. During that call, CHU told Lee about another Firm
consultant who worked at Broadcom (the “Broadcom Employee”), and
who could provide “top line revenues” for Broadcom. CHU and Lee
then discussed how Lee could contact the Broadcom Employee (who
also worked as a Firm consultant). On November 21, 2010, CHU
spoke with FBI agents. CHU told the FBI agents that the Broadcom
Employee “probably gave [a certain hedge fund manager] Broadcom’s
revenue numbers before Broadcom’s quarter end because that is
what [the Broadcom Employee] does. When you ask [the Broadcom
Employee] for Broadcom’s revenue numbers, [the Broadcom Employee]
will give it to you.”
* * *
CHU, 56, of Somerset, New Jersey, has been charged with
one count of conspiracy to commit securities fraud (Count One)
and one count of conspiracy to commit wire fraud and fraud in
connection with securities (Count Two). Count One carries a
maximum potential penalty of 5 years in prison and a fine of
$250,000 or twice the gross gain or loss from the offense, and
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Count Two carries a maximum potential penalty of 25 years in
prison and a fine of $250,000 or twice the gross gain or loss
from the offense.
* * *
Mr. BHARARA praised the investigative work of the
Federal Bureau of Investigation. He also thanked the U.S.
Securities and Exchange Commission. Mr. BHARARA also 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 REED
BRODSKY, DAVID LEIBOWITZ, and ANTONIA APPS, and Special Assistant
U.S. Attorney ANDREW MICHAELSON are in charge of the prosecution.
The charges contained in the Complaint are merely
accusations, and the defendants are presumed innocent unless and
until proven guilty.
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