John Kinnucan, an independent analyst with a financial services firm, was sitting on his front porch in Portland, Oregon sipping wine on Oct. 25 when two men in business suits emerged from a gray sedan and identified themselves as FBI agents.
They were there to flip him, to have him cooperate and give them an inside look at his clients as part of a wide-ranging investigation of insider trading which has lead to searches of hedge funds in recent days.
Kinnucan’s disclosure of the FBI’s attempt to flip him in an e-mail to about 20 hedge-fund and mutual-fund clients lead to a Wall Street Journal report over the weekend, which apparently forced the FBI’s hand.
On Monday they executed searches at several firms including Level Global Investors of New York and Diamondback Capital Management of Stamford, Conn. and Loch Capital Management. The FBI agents wanted him to talk with SAC Capital Advisors, headed by Steve Cohen, according to reports.
The Feds are also looking at whether Goldman Sachs Group Inc. bankers leaked information about transactions in ways which benefited particular investors, people familiar with the probes told the newspaper.
Investigators are focusing on new ways that non-public information has been passed on to traders by experts with ties to specific industries or companies, the Wall Street Journal reported. They are looking at whether independent analysts and consultants working for companies providing “expert network” services to hedge funds and mutual funds passed along non-public information, the newspaper said.
Because the searches are part of an ongoing investigation, the FBI isn’t commenting.
“We are conducting court-authorized search warrants as part of an ongoing investigation,” Richard Kolko of the FBI’s New York office told the Wall Street Journal. “The matter is sealed. We have no further comment.”
The probe is part of an effort by Preet Bharara, the U.S. Attorney for the Southern District of New York, who has made combatting insider trading a top priority.
Kinnucan told the Wall Street Journal that he invited the agents into his kitchen after they showed up to his home.
One of the agents was David Makol, who is known by prosecutors for both his experience with insider-trading investigations as well as his ability to flip defendants to help agents gather evidence, said the newspaper.
It was Makol who flipped one a defendant in another case involving the Galleon Group. In that case Makol confronted David Slaine in a Starbucks near his home in Connecticut, said the newspaper, by “confronting him with an array of details about his life and work.” He became a government informant who wore a wire strapped to his body and helped build what became one of the biggest insider-trading case in two decades, said the newspaper.
After the agents left, Kinnucan sent an email to clients at 12:56 a.m. which he said he was contractually required to send.
“Today two fresh faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information,” the email said. “(They obviously have been recording my cell phone conversations for quite some time, with what motivation I have no idea.) We obviously beg to differ, so have therefore declined the young gentleman’s gracious offer to wear a wire and therefore ensnare you in their devious web.”
More searches may be executed in the next few days, a person briefed on the investigation who spoke only on the condition of anonymity told the New York Times.