1FBI Files Say Hedge Fund Analyst Made Millions on Tips From Dell Insider
By Neil Weinberg, David Glovin and Patricia Hurtado Nov 25, 2014 4:00 AM CT
Manhattan U.S. Attorney Preet Bharara said Jan. 7, “Part of our job is to
make sure... Read More
The FBI files spell it out: An analyst at Citadel LLC, the hedge fund with $
23 billion in capital invested globally, told agents he made millions of
dollars trading on information from a company insider.
It was December 2011, and the Justice Department was deep into a seven-year
investigation into illegal stock tips. As authorities homed in on people at
several other hedge funds over leaks from a Dell Inc. employee, agents at
the Federal Bureau of Investigation began questioning the Citadel analyst
about the friendship he formed with the same Dell insider.
In confidential FBI reports summarizing those interviews, agents recounted
how the Citadel analyst received market-sensitive information from the Dell
employee in 2008 and 2009. In one trade he told agents he made, the analyst
bet against Dell after learning it would announce disappointing earnings,
bringing in $5 million to $6 million when the company’s shares fell by more
than 10 percent. He told agents he later discarded records.
The analyst discussed helping the Dell employee hunt for a Wall Street job,
the agents wrote. “It became an ‘I’ll scratch your back if you scratch
mine’” relationship, the agents wrote in a summary of a Jan. 4, 2012,
interview with the analyst.
Photographer: Brent Lewin/Bloomberg
A Dell Inc. advertisement.
Nine people at five investment firms were eventually convicted in part for
trading on tips from inside Dell.
Neither the analyst, Richard Farmer, nor the Dell employee, Rob Ray, was
sued by regulators or prosecuted. Chicago-based Citadel hasn’t been accused
Four people familiar with the probe said U.S. authorities investigated
Farmer. Those people, who spoke confidentially because the matter isn’t
public, said authorities didn’t have evidence to charge him. They declined
Both Farmer and Ray have since left their jobs. The previously undisclosed
relationship described in the FBI documents recapping agents’ interviews --
two with Farmer and five with Ray -- were among dozens of such summaries
reviewed by Bloomberg News.
Those documents offer a glimpse into how authorities mounted their insider-
trading investigation starting in 2007, an effort that led to more than 80
convictions, brought down at least five hedge funds and resulted in more
than $2 billion in payments from defendants as part of the largest such
action in U.S. history. The Dell tips from Ray were part of Manhattan U.S.
Attorney Preet Bharara’s highest-profile prosecution, against Steven A.
Cohen’s SAC Capital Advisors LP, which Bharara branded a “veritable magnet
for market cheaters.”
By the Rules
Insider trading had become rampant on Wall Street, Bharara has said, eroding
trust in financial markets and harming honest people who make trades based
on publicly available information.
“Part of our job is to make sure that the world understands,” Bharara said
in a Jan. 7, 2014, interview on PBS’s Frontline, “that it doesn’t matter
who you are, how much money you have, who you’re connected to, that you
have to play by the same rules as everyone else.”
The FBI summaries show how investigators’ work took them down a previously
unreported path into Citadel.
The Chicago fund’s name surfaced once in connection with Bharara’s probe.
The July 2013 indictment of SAC Capital said Cohen received a warning about
someone he wanted to hire. An unnamed employee of an unidentified hedge fund
told Cohen that the prospective hire was part of an “insider trading group
” where he worked. That fund was Citadel, people familiar with the
Citadel, in a statement at the time, called the claim baseless. SAC hired
the person, who had worked in a different part of Citadel than Farmer, as a
portfolio manager. He was later convicted of insider trading at SAC.
Farmer, approached at his home in July when he was still working for Citadel
, declined to comment. He has since left the firm “on amicable terms,”
according to his lawyer, David Stetler.
“When contacted by the government, my client truthfully and candidly
answered any and all questions, allowing the U.S. Attorney to conclude that
no charges were warranted,” Stetler wrote in a statement. “In fairness,
that should be the end of the story.”
Chris Sinos, a spokesman for the FBI in New York, declined to comment on the
investigation. Jerika Richardson, a spokeswoman for Bharara, declined to
comment on the government’s actions.
Bloomberg News reviewed information about the investigation with Citadel
officials, none of whom commented for this article.
Breach of Duty
Insider-trading cases can be complicated to make. Courts keep refining what
prosecutors must prove. Among the things they must show is that the person
giving the information received a benefit, and that people trading on the
tips knew the tipper breached a duty of confidentiality.
At the center of the Dell-leaks story was Ray, who in 2008 was a junior
member of the computer-maker’s investor-relations team.
Ray shared tips with Sandeep “Sandy” Goyal, a Wall Street analyst who in
turn passed along the information to others. That’s according to testimony
from Goyal, which the government used to build part of its case against
several hedge-fund managers. Ray was identified in trials against three of
those people but didn’t testify.
A federal court in Manhattan is now weighing the appeals of two of those
convicted for trading on Dell tips. The FBI documents don’t address issues
before the appeals court. They do show that Ray’s tips to Goyal weren’t
isolated -- flowing, too, to Farmer at Citadel.
An attorney for Ray told prosecutors, in a confidential 2012 letter, that
Ray didn’t believe he’d done anything illegal. Ray hired the lawyer,
Joanna Hendon, after he and a different attorney met with the FBI. In the
letter, addressing Ray’s alleged leaks to Goyal, Hendon said it was her
speculation that if her client indeed leaked Dell information, it was
because he was manipulated.
The FBI documents represent federal agents’ retelling of the interviews
with Farmer and Ray. Agents typed up official reports from interviewers’
handwritten notes, sometimes weeks later. Information ascribed to the
subjects, including dates of conversations or trades that took place roughly
three years earlier, were at times imprecise. The reports generally don’t
specify whether passages that appear inside quotation marks are the agents’
words or those of the interview subjects.
The FBI interviews with Ray and Farmer -- as well as portions of Goyal’s
trial testimony and interviews he gave to the FBI -- provide similar
accounts. Both Farmer and Goyal got what they believed was nonpublic
information from Ray ahead of Dell announcements and offered to help him
find an investment-management job, agents wrote.
Ray, now 39, and Farmer, 42, came to authorities’ attention more than four
years after agents in the government’s insider-trading probe secured their
first cooperating witnesses, and two years after prosecutors made their
first big public splash with the arrest of Galleon Group LLC co-founder Raj
By late 2011, when the FBI began interviewing Ray and Farmer, the government
already had gained the secret cooperation of at least three men who said
they were part of a group swapping inside tips about technology companies.
Among these government witnesses was Goyal, an analyst at New York-based
Goyal’s testimony in a 2012 insider-trading trial outlined a relationship
with Ray that stretched back to their university days. They later worked
together at Dell.
Goyal told jurors he had relayed “confidential information” about Dell to
an analyst at Stamford, Connecticut-based Diamondback Capital Management LLC
. The tips came from Ray, Goyal said, adding that Ray had sought resume
advice and help getting a job in investment management.
He didn’t identify Ray to the Diamondback analyst, he testified, telling
the analyst the tips came from a Dell insider who worked in investor
relations and then corporate development. To Ray, Goyal said he was using
the Dell data for his own financial analysis and didn’t reveal that he was
passing the information to others.
Ray’s lawyer, Hendon, speculated in her 2012 letter to U.S. prosecutors
that “if Mr. Goyal obtained material nonpublic information from my client,
he may have done so by out-maneuvering a relatively junior I.R. professional
Goyal and four others pleaded guilty in part to trading on the Dell tips.
His testimony, along with accounts of others in the group and e-mails of
members swapping tips on tech firms including Dell, helped convict three
Ray’s Dell tips had also been reaching someone at Citadel, Goyal told
agents during his own FBI interviews.
Goyal said Ray had spoken of being contacted by a Citadel employee, Farmer,
who “was very aggressive” and “trying to get numbers and data points from
Ray,” FBI agents wrote in summarizing the interviews with Goyal.
On Dec. 8, 2011, two FBI agents approached Ray, who was no longer working at
Dell, near his new offices.
“Ray stated that he knew what he did was wrong and that he wanted to do
whatever he can to cooperate and help the government,” FBI agents wrote in
a summary of that meeting. “Ray stated that he got caught up in getting
into the buy-side and that he crossed the line.”
The agents encouraged him to attend an interview at a U.S. Attorney’s
The next day, Ray told the FBI about how he met Farmer at a Dell investor-
relations dinner at the Marriott Hotel near Dell’s Round Rock, Texas,
headquarters in late 2007 or early 2008. Soon after, Ray began sharing
guidance on Dell results, including projected gross margins. He said he “
would have been reprimanded if Dell listened into his calls with Goyal and
Farmer,” agents wrote in a summary of the Dec. 9 interview.
Ray gave that and the previous day’s comments without a lawyer present.
During three interviews in January 2012, he was accompanied by attorney
Richard Langweber, who declined to comment.
Some of the summaries of agents’ interviews with Ray and Farmer were marked
as proffers. Under such agreements, authorities interview potential
witnesses, defendants or others to build investigative leads while agreeing
generally not to use interviewees’ own statements as evidence against them.
Prosecutors may grant immunity to the people interviewed, offer a plea deal,
let the matter drop or pursue a case based on other evidence. Those found
lying to federal agents can be prosecuted. During the insider-trading probe,
scores of people sat for interviews with the FBI.
On Dec. 30, 2011, the last day of a slack holiday trading week, an FBI agent
and two assistant U.S. attorneys met with Farmer and his lawyer.
Farmer, a Colorado native with a Dartmouth College psychology degree and a
University of Chicago MBA, covered technology stocks at Merrill Lynch until
2007. Citadel then hired him as an analyst, an agent wrote.
Farmer began calling Ray with questions about the industry shortly after the
two met at the Dell dinner, agents cited both men as saying. Farmer told
the FBI he eventually acted as a mentor, editing Ray’s resume and talking
about job leads.
Ray said his investor-relations work gave him access to a “nitty gritty
level” of detail about Dell’s finances. Ray said he and Farmer chatted on
mobile phones, with some of the conversations occurring during the quiet
period ahead of Dell’s quarterly earnings releases, a time when companies
must limit the information they make public. The conversations included
financial details, agents wrote, such as “percentages, tight ranges, gross
margins and which parts of Dell’s business was going well.”
In his interviews, Ray said Farmer would provide a gross margin range, such
as 17 percent to 18 percent, and Ray would say more specifically what the
margin would be. Farmer, in his interviews, said he had asked Ray if
operating margins “could be worse than ‘X,’” the agents wrote.
The analyst said he understood he was receiving confidential information
that wasn’t available to everyone, agents wrote. He “got inside
information from Ray for three or four quarters,” they wrote.
Hendon, Ray’s current lawyer, said her client didn’t break the law.
“Ray told the agents he provided analysts with information and ‘color’
vetted by his supervisors, that he did not believe he had done anything
wrong, and that he was unaware of insider trading by anyone,” Hendon said
in a statement.
“Under pressure, he agreed with the suggestion -- advanced many times by
the agents and rejected as many by Ray -- that it was ‘possible’ he had ‘
crossed a line’ when speaking to analysts. (Getting to the buy side was
another of the agents’ suggestions.) The next day, Ray told the agents he
wanted to recant that statement, because it was not true,” Hendon said.
Lawyers for three of the men who were convicted in part for trading on Dell
tips that traveled through Goyal -- Level Global Investors’ Anthony
Chiasson, Diamondback Capital’s Todd Newman and Michael Steinberg of
Stamford, Connecticut-based SAC Capital -- argued at trials that prosecutors
didn’t show that what their clients did was illegal.
Attorneys for Chiasson and Newman said their clients didn’t know whether
the source of the Dell data divulged confidential information or received a
benefit for doing so, as they say prosecutors must show. These lawyers
argued at trials that Dell’s investor-relations unit was “leaky” --
giving out advance word about finances to build relationships with firms
that might invest in Dell.
At the trials, a Dell official denied the firm was leaky. “Dell would not
authorize providing confidential financial information or any other
confidential information outside the company,” David Frink, a Dell
spokesman, said in a statement. He declined to comment on Ray.
The government also undermined the cases it built on the Dell tips by not
prosecuting Ray himself, attorneys for Chiasson and Newman argued in their
appeal. Whether or not Ray was charged shouldn’t affect the appeal,
prosecutors have said.
Steinberg’s appeal hasn’t yet been heard and is pending the court’s
ruling on Chiasson and Newman. Attorneys for Chiasson, Newman and Steinberg
declined to comment for this article.
At Citadel, analysts such as Farmer could trade portions of a portfolio and
share in the gains and losses stemming from their picks. Farmer said a
superior had berated him for his performance and urged him to take some “
swings” trading stocks, the agents wrote.
Agents described trades that Farmer said he made, starting in 2008, using
the Dell tips. It wasn’t clear whether he was working from memory during
Farmer recalled that he used Ray’s tips in the summer of 2008, according to
the FBI memos. In July, agents wrote, Farmer held a short position in Dell,
a bet that the shares’ value would fall. Ray helped Farmer to confirm his
view about Dell’s weakness, the agents wrote. Farmer told the agents that
he brought in $5 million to $6 million, they wrote, when the shares dropped
15 to 18 percent.
It was the next month -- after markets closed on Aug. 28, 2008 -- that Dell
announced its gross margin, and profit, had missed analysts’ projections.
Shares fell 13.8 percent the next day and Dell lost $7 billion market value
as roughly 100 million shares changed hands, more than twice the trading in
the days before and after. Prosecutors characterized trades that Chiasson,
Newman and Steinberg made on the gross-margin miss, based on information
that came through Goyal, as “the big shorts.”
Farmer also told the agents that before Dell’s 2009 meeting with analysts,
Ray -- who had by then moved from his job in investor-relations to corporate
development -- had “volunteered that there was margin pressure.” Farmer
reversed his small bet that Dell shares would rise and shorted them instead,
agents wrote in the interview summary. The trade brought a six-figure
profit when the news became public, they wrote.
When Dell publicly released its worse-than-projected figures after markets
closed on July 13, 2009 -- the eve of Dell’s analyst day -- the company’s
shares fell 8.1 percent.
Farmer had another conversation with Ray after analyst day in which Ray
advised Farmer that margins were even worse than reported, the agents wrote.
Farmer made his short position larger, they wrote.
Another trade by Farmer described in the FBI documents wasn’t consistent
with events at the time.
By the second half of 2009, federal lawmakers were at work on legislation,
which became known as the Dodd-Frank Act, laying down new rules on how banks
and hedge funds should retain trading records. The October 2009 arrest of
Galleon’s Rajaratnam, meanwhile, sent shock waves through the hedge fund
Shortly after returning from a trip in late 2009, Farmer erased electronic
notes, in Microsoft Word format, that were stored on thumb drives, Zip
drives and a shared drive at Citadel, agents wrote in a summary of one of
the interviews with him. Farmer also threw away his handwritten notes
because that was his normal practice and because they were incriminating,
Farmer got rid of e-mails as well, according to their summary.
“This,” they wrote, “wiped the slate clean.”
To contact the reporters on this story: Neil Weinberg in New York at
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; David Glovin in New York at [email protected]
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Patricia Hurtado in Federal Court in Manhattan at
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