NEW YORK (CNNMoney.com) -- The feds on Wednesday escalated their unfolding insider-trading crackdown by arresting an employee of an "expert-networking" firm who allegedly conspired to leak information to hedge funds.
Don Chin Trang Chu, known as Don Chu, arranged for insiders at publicly traded companies to provide information to hedge funds "for the purpose of executing profitable securities transactions," according to a federal complaint unsealed in a Manhattan court.
The complaint said Chu worked for an "expert networking" firm based in California without naming the company. A spokesperson for Mountain View, Calif.-based Primary Global Research said in a statement that Chu was the company's Taiwan liason for about 7 years.
"Based upon recent events, PGR has severed its relationship with Mr. Chu," the spokesperson said.
The arrest came days after FBI agents raided the offices of three hedge funds in New York, Connecticut and Boston. The raids were seen as part of a broad investigation into insider trading that centers on expert networking firms, which provide research "services" to large institutional investors.
Preet Bharara, U.S. attorney for the Southern District of New York, and Janice Fedarcyk, of the New York office of the FBI, announced the arrest in New York. A spokesman for the U.S. attorney declined to elaborate on the arrest or the broader probe.
Chu, 56, of Somerset, N.J, was scheduled to depart to Taiwan on Sunday, prosecutors said. He has been charged with wire and securities fraud, and could face up to 25 years in prison if convicted.
In 2008, Chu established a relationship with Richard Choo-Beng Lee, who at that time worked for an unnamed hedge fund, prosecutors said.
Lee began cooperating with investigators in April 2009 and has since entered a guilty plea on charges of conspiracy and securities fraud.
Chu arranged for his firm's experts to leak a technology company's quarterly earnings results to hedge funds, which used the information to their advantage in the stock market. The funds allegedly paid Chu's firm by using it to execute trades based on the information, paying commissions and fees to the firm's broker-dealers, the prosecutors said.
In August 2009, Chu told Lee in a phone conversation that a Broadcom employee could provide "top line revenues" for the company, prosecutors said.
Chu then told FBI agents last week 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," according to the complaint. "When you ask [the Broadcom employee] for Broadcom's revenue numbers, [the Broadcom employee] will give it to you."
The lawyer representing Chu, Jeffery Plotkin of Day Pitney, did not immediately respond to calls requesting comment.
The Wall Street Journal reported last week that the government is wrapping up a three-year investigation into insider trading and expert consulting firms. Such firms have become widespread on Wall Street in the last few years but remain relatively unknown outside of financial circles.
Expert networking firms often connect big investment firms such as hedge funds and mutual funds with consultants that can provide insight into companies they are interested in or already invested in. In some cases, the experts are a customer, client or employee of the company in question.
Latour "LT" Lafferty, a former federal prosecutor who now heads the white collar crime division at Florida law firm Fowler White Boggs, said expert networking firms are not as tightly regulated as other companies in the financial services industry and are therefore "ripe for abuse."
Given the recent spate of raids and Wednesday's arrest, Lafferty expects regulators to announce additional charges in the weeks ahead.
In the second half of the 20th century, Toys "R" Us was a powerhouse. Then came Walmart. More
Everything seems to move faster in the Trump era, perhaps even the deliberate Federal Reserve. More
"It's like competing in an Olympic race wearing lead shoes," Elon Musk, referring to trade rules with China, tweeted to President Donald Trump. More
In 1998, Ntsiki Biyela won a scholarship to study wine making. Now she's about to launch her own brand. More
Good news for procrastinators: You get two extra days to file your federal income taxes. April 15 falls on a weekend and April 16 is a public holiday in the District of Columbia. More