SEC Charges Oregon-Based Expert Consulting Firm and Owner with Insider Trading in Technology Sector
The Securities and Exchange Commission today charged John Kinnucan and his Portland, Oregon-based expert consulting firm Broadband Research Corporation with insider trading. The charges stem from the SEC’s ongoing investigation of insider trading involving expert networks.
The SEC alleges that Kinnucan and Broadband claimed to be in the business of providing clients with legitimate research about publicly-traded technology companies, but instead typically tipped clients with material nonpublic information that Kinnucan obtained from prohibited sources inside the companies. Clients then traded on the inside information. Portfolio managers and analysts at prominent hedge funds and investment advisers paid Kinnucan and Broadband significant consulting fees for the information they provided. Kinnucan in turn compensated his sources with cash, meals, ski trips and other vacations, and even befriended some sources to gain access to confidential information.
In a parallel criminal case, Kinnucan has been arrested and charged with one count of conspiracy to commit securities fraud, one count of conspiracy to commit wire fraud, and two counts of securities fraud.
“Obtaining important and unreported financial results from company insiders and selling that information to hedge funds is not legitimate expert networking services — it’s old-fashioned insider trading,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.
The SEC has charged 22 defendants in enforcement actions arising out of its expert networks investigation, which has uncovered widespread insider trading at several hedge funds and other investment advisory firms. The insider trading has occurred in the securities of 12 technology companies — including Apple, Dell, Fairchild Semiconductor, Marvell Technology, and Western Digital — for illicit gains totaling nearly $110 million. Related SEC insider trading cases stemming from the Galleon investigation involved illicit gains in excess of $91 million.
According to the SEC’s complaint filed in federal court in Manhattan, Kinnucan’s misconduct occurred from at least 2009 to 2010, a period during which he generated hundreds of thousands of dollars in annual revenues for Broadband. Kinnucan obtained material nonpublic information from well-placed employees at a variety of publicly-traded technology companies.
The SEC’s complaint specifically alleges that in July 2010, Kinnucan obtained material nonpublic information from a source at F5 Networks Inc., a Seattle-based provider of networking technology. On the morning of July 2, Kinnucan learned that F5 had generated better-than-expected financial results for the third quarter of its 2010 fiscal year, with the public announcement scheduled for July 21. Within hours of learning the confidential details, Kinnucan had phone conversations or left messages with several clients to convey that F5’s revenues would exceed market expectations. At least three clients — an analyst and two portfolio managers — caused trades at their respective investment advisory firms on the basis of Kinnucan’s inside information. The insider trading resulted in profits or avoided losses of nearly $1.6 million.
The SEC’s complaint, which charges Kinnucan and Broadband with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, seeks a final judgment ordering them to disgorge their ill-gotten gains plus prejudgment interest, requiring them to pay financial penalties, and permanently enjoining them from future violations.
The SEC’s investigation, which is continuing, has been conducted by Joseph Sansone and Daniel Marcus — members of the SEC’s Market Abuse Unit in New York — and Matthew Watkins, Neil Hendelman, Diego Brucculeri and James D’Avino of the New York Regional Office. The SEC thanks the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation for their assistance in the matter.