Nov. 23 (Bloomberg) -- Danielle Chiesi spent a lot of time in hotel ballrooms and bars during the past decade.
As an analyst at New Castle Funds LLC, a New York hedge fund firm that manages about $1 billion, she was a regular at conferences on technology stocks, where she could get face time with executives and press them on how many microprocessors and how much software they were shipping that quarter.
Chiesi wore short skirts and low-cut tops, according to people who saw her over the years. One ploy was to go barhopping with a group, and then peel someone off to talk to on the dance floor, says a person who attended conferences with her.
A blond, blue-eyed former teenage beauty queen, Chiesi used her sexuality to build sources at male-dominated tech companies, says Deborah Stapleton, president of Stapleton Communications Inc., an investor relations company in Palo Alto, California. Stapleton says Chiesi was proud of her network, too, and says,
“It amazes me that grown, wealthy, successful, hardworking men fell for that. She bragged about her contacts in public. She was like a teenager who wanted everyone to know she knew some rock star.”
U.S. authorities say Chiesi, 44, crossed the line in her pursuit of secrets. They charged her and 19 others with securities fraud in the largest insider-trading case prosecuted since the 1980s, when stock market arbitrager Ivan Boesky paid a $100 million fine and spent three years in prison.
Chiesi, they say, got tips from executives at technology companies and passed them along to other hedge fund managers, including Raj Rajaratman, billionaire co-founder of New York- based Galleon Group LLC, who was also arrested in the case. Rajaratnam, who is liquidating his hedge funds, has denied wrongdoing. Chiesi’s lawyer, Alan Kaufman, says his client intends to plead innocent.
The one-time sorority sister at the Unviersity of Colorado is a small fry compared with Rajaratnam, who managed $7 billion in 2008. Of all the alleged conspirators, though, she had the highest-placed sources. She was in regular contact with Hector Ruiz, Advanced Micro Devices’ former chairman and chief executive officer, according to a person familiar with the investigation.
Government prosecutors say she was friends with Robert Moffat, a senior vice president of IBM, who was a candidate to succeed CEO Sam Palmisano. An unidentified family friend at Akamai Technologies Inc. allegedly gave her a tip so accurate that New Castle made more than $2.4 million in one week.
The prosecution marks the first time the U.S. government has tapped phones to get evidence against hedge funds, the lightly regulated partnerships that control $1.4 trillion. After two rounds of arrests -- one on Oct. 16 and another on Nov. 5 -- Preet Bharara, U.S. attorney for the Southern District of New York, says he’s just getting started.
“No one should assume that our aggressive policing of the hedge fund industry will stop at these two cases,” Bharara said at a press conference after the second roundup.
Bharara’s promise of a wider crackdown has hedge fund managers thinking twice about picking up the phone, according to an executive at one multibillion-dollar fund. And everyone is wondering whose conversations will spill into the public domain next.
The ones released so far show that Chiesi may have been the most aggressive of those charged when it came to pursuing tips and tipsters. Her only competition is Zvi Goffer, 33, a former trader at Schottenfeld Group LLC in New York known to some members of the ring as Octopussy, a nod to the 1983 James Bond movie starring Roger Moore, “because he had arms in so many sources of inside information,” according to a Nov. 5 complaint filed by the Securities and Exchange Commission, which is also pursuing the case.
While Chiesi may have had fewer sources, they were well placed, and she worked them hard. She made plans to meet with IBM’s Moffat at her mother’s house in Sherman, Connecticut, on a Sunday, government wiretaps show. She talked into the evening with Ruiz from AMD, and she sought to re-establish the trust of the family friend at Akamai so she could pump him for information.
Chiesi, one of only two women charged -- the other is cooperating with prosecutors -- sparred with Rajaratnam over who had the best sources.
“I must defer to you on IBM,” Rajaratnam told Chiesi on a call taped by the Federal Bureau of Investigation on Sept. 23, 2008.
“And Akamai, too,” Chiesi said.
“But AMD?” said Rajaratnam. “Bring it on, baby.”
Bear Stearns Inquiry
Chiesi’s comments on wiretaps read like dialogue from a Quentin Tarantino movie.
“Unless you were on the phone with (the AMD executive) and had Moffat at your house last night, who the f--k would be buying it, honestly?” she asked Mark Kurland, her boss at New Castle, about AMD on Sept. 9, 2008.
Chiesi may have been breaking the rules for years. Officials at Bear Stearns Cos., which owned New Castle until January 2009, investigated Chiesi for insider trading at least once in the past five years, according to people familiar with the probe. They suspected Chiesi received nonpublic financial information from an executive at AMD, the Sunnyvale, California- based chipmaker. The investigation was inconclusive, the people say.
Kurland, managing general partner at New Castle, encouraged Chiesi’s source building, according to government wiretaps. Kurland, 60, who was also arrested, said on a phone call taped on August 22, 2008,
“This is what I think you should do more of, what you’re doing more of now. You know, get more relationships. Why don’t you just worry about getting the information, and don’t worry about the numbers.”
Kurland declined to comment.
The source building paid off: New Castle made $3.8 million in six months, starting in July 2008, using information gathered by Chiesi, the government says. And that’s only on the trades detailed by the U.S. Department of Justice.
For someone allegedly dealing in illegal secrets, Chiesi didn’t care much about her cover. At conferences, she would brag in a loud voice that she could get AMD’s Ruiz on the phone anytime, according to a person who heard her.
Such brashness was nothing new. When she worked at New York brokerage Furman Selz LLC in the early 1990s, she would show up in a tight red suit with red fishnet stockings, says a person who worked there at the time. She dated a man on the trading desk and didn’t try to hide it, the person says.
Chiesi, who grew up in Binghamton, New York, is the daughter of an insurance executive and the granddaughter of a restaurateur, according to an obituary of her father published by the University of Michigan, his alma mater, after he died in 2002 at 65.
Her grandfather, Swiss-born Alex Chiesi, studied with French chef Auguste Escoffier, who invented the Peach Melba dessert while running the restaurant at the Savoy Hotel in London in 1893. Alex moved to the U.S., where he owned several restaurants, including the Hapsburg House on East 55th Street in New York, according to the obituary.
In 1956, Alex took his family on vacation in Europe. On the way home, his son, Alex Chiesi Jr., met a 17-year-old Italian woman named Gloria who was scheduled to take the SS Andrea Doria to the U.S. By luck, she missed its departure, according to the obituary. The Andrea Doria collided with the Swedish liner Stockholm and sank off Nantucket that July, killing 46 on the Andrea Doria and five on the Stockholm.
Miss Southern Tier
Alex Jr. and Gloria married in 1963. He became an executive at Binghamton-based Security Mutual Life Insurance Co. of New York, according to the obituary. The couple raised three children in New York state’s Southern Tier, the area along the Pennsylvania border.
Their middle child, Danielle, was named Miss Southern Tier Teenager in 1981 and appeared in the local paper wearing a tiara. She went west for college, enrolling at the University of Colorado at Boulder, where she rushed the PiBeta Phi sorority. Says Stacey Maggio, a sorority sister,
“Danielle was really social, gregarious and popular. She was a knockout with a big heart.”
Chiesi graduated in 1988 with a bachelor’s degree in economics. She moved to New York, where she took a job at Mabon, Nugent & Co., a small brokerage. There, she got to know Kurland, then an analyst following paper and packaging companies, according to a person who worked at Mabon at the time.
Chiesi bounced around after Mabon. Her first stop was Furman Selz, one of the first brokers to target hedge funds as clients. In 1994, she landed at securities firm Arnold & S. Bleichroeder Advisers LLC, where hedge fund legend George Soros worked from 1963 to 1973. In 1996, she joined Kurland, who had started New Castle a year earlier with another Mabon alumnus. The same year she joined New Castle, Chiesi divorced her husband, Brian Feeney, after a 16-month marriage.
Kurland was head of research at the brokerage division of Bear Stearns before starting New Castle. Tad LaFountain, an analyst the industry four years ago and lives in Princeton, New Jersey, and who worked for him at Bear Stearns from 1993 to 1995 says,
“He wasn’t much of a stock picker when I was there. I only would have given Mark my lunch money to invest if I had wanted to lose weight."
LaFountain says Kurland once prodded him to raise his rating on Vishay Intertechnology Inc., a publicly traded electronics maker, in response to pressure from Bear Stearns’s investment bankers. LaFountain refused, and Kurland switched coverage of Vishay to another analyst who raised the rating, LaFountain says.
Vishay picked Bear to manage the sale of 5 million shares at a split-adjusted $19.23 a share in September 1995. Vishay stock tumbled after the offering, touching $11.63 a share three months later.
“They damn near top ticked it,” LaFountain says.
As a technology analyst at New Castle, Chiesi spent much of her time visiting companies and contacts on the West Coast, according to former Bear Stearns employees. One of those contacts, says a person familiar with the matter, was Ruiz, 63, the former CEO of AMD, Intel Corp's smaller competitor in the microprocessor market.
Ruiz, who hasn’t been charged with any wrong-doing and who declined to comment through a spokesman, isn’t a child of privilege like Chiesi. A Mexican immigrant, he walked 45 minutes each way to high school in the south Texas town of Eagle Pass and graduated as valedictorian. He went on to get a doctorate in engineering in 1973 from Rice University in Houston and worked at Motorola Inc. for 23 years.
He joined AMD in 2000 and succeeded founder Jerry Sanders as CEO two years later. Where Sanders was flashy -- he wore handtailored suits, one of which had his name sewn over and over in faint pinstripes -- Ruiz was staid.
“He’s the quintessential engineer,” says Robert Enderle, a technology analyst at Enderle Group in San Jose, California. “He’s very comfortable in a pocket protector, not so comfortable in an Armani suit.”
It isn’t known when Ruiz and Chiesi met, when he started sharing information with her, or why. Chiesi’s contact with someone at AMD prompted the Bear Stearns investigation of her trading, according to the people familiar with the probe. They say they didn’t know the executive’s identity.
While the investigation turned up nothing untoward, it did anger Kurland, the people say. Kurland suspected someone on Bear Stearns’s trading desk, which bought and sold stocks for all of the internal funds, of raising concerns about Chiesi’s sources. He pushed even harder for his own trading desk, something that he had long wanted, the people say. He also tried to promote Chiesi to senior managing director several times in recent years, they say. Each time, Bear Stearns turned him down.
Mary Sedarat, a spokeswoman for JPMorgan Chase & Co., which bought Bear Stearns last year, declined to comment.
Moffat, Chiesi’s alleged source at Armonk, New York-based computer-services provider IBM, was almost as valuable as Ruiz in terms of his clout. The 53-year-old senior vice president ran the systems and technology group, which had sales of $19 billion in 2008.
“He’s a huge coup for me, having him at IBM,” Chiesi said on a taped call with Rajaratnam in September 2008.
Galleon Boat Ride
Chiesi met Rajaratnam at a conference about five years ago, according to a person familiar with the matter. They enjoyed the bull market together. On a 2007 boat ride around Manhattan hosted by Galleon, Chiesi danced suggestively, according to an attendee. On another occasion, Rajaratnam hired country singer Kenny Rogers to perform at a party. Chiesi brought her mother and was more restrained, an attendee says.
For a hedge fund analyst, Chiesi had some unusual money problems. In 2006, the board at her co-operative apartment building at 418 E. 59th St. in New York requested an eviction warrant for nonpayment of an $11,301 debt, according to court records. On Aug. 12, 2008, in the midst of the alleged insider- trading spree that earned New Castle almost $4 million, the IRS filed a lien against her apartment for $63,226 in unpaid taxes.
In 2000, New York courts issued a warrant for possession of an apartment she lived in at 333 East 56th St. for nonpayment of $5,223.
‘Gonna Guide Down’
Prosecutors say they’ve been investigating the insider- trading case since at least November 2007. The FBI got permission from a judge to tap Rajaratnam’s mobile phone on March 7, 2008, according to the government’s complaint.
Agents started listening in time to hear Chiesi and Kurland make what was allegedly their biggest killing. Chiesi’s contact at Akamai called her cell phone at 8:52 p.m. on July 24, a Thursday, and said the Cambridge, Massachusetts-based company, the largest supplier of software and services to make Web sites load faster, was going to lower its earnings forecast when it reported results the following Wednesday.
Chiesi hung up and called Kurland. Then she called Rajaratnam.
“Akamai,” she said. “I’m trading it tomorrow. They’re gonna guide down. I just got a call from my guy.”
The next morning, she called Steven Fortuna, 47, co-founder of S2 Capital Management LP, a hedge fund firm with offices in New York and in Boston, near where Fortuna lives.
New Castle, Galleon and S2 all sold short Akamai shares. In a short sale, a trader borrows shares from an investor and sells them, hoping to buy them back at a lower price later, return the shares and keep the profit. New Castle also bought put options, giving it the right to sell a fixed number of Akamai shares at a certain price. Like a short sale, a put option is a bet that prices will fall.
On Wednesday, July 30, after the market closed, Akamai cut its profit forecast to a range of $1.63 to $1.69 a share from an earlier $1.68 to $1.71 a share. Akamai shares took their biggest-ever tumble the next day, dropping 25 percent.
New Castle covered its short position and sold its put options, making about $2.4 million, according to the Justice Department. Galleon made $3.5 million, and S2 made $2.4 million. Fortuna pleaded guilty to securities fraud and is cooperating with the government.
New Castle also traded on AMD and IBM tips, the government says. Chiesi spoke with Ruiz in August 2008 about AMD’s plan to spin off its manufacturing plants, a move she expected would boost the company’s stock. New Castle bought at least 327,000 shares of AMD during a six-week period starting on Aug. 15.
At one point, Chiesi became nervous, according to transcripts of her calls.
Talking by phone with an unnamed person about the AMD spinoff, she said: “I swear to you in front of god, you put me in jail if you talk. I’m dead if this leaks. I really am. And my career is over. I’ll be like Martha f---ing Stewart.”
Stewart, the homemaking media mogul, served five months in prison after a jury convicted her of lying to investigators about her sale of ImClone Systems Inc. shares in December 2001.
AMD announced the spinoff and a $1 billion investment from the government of Abu Dhabi on Oct. 7, 2008. The deal allowed AMD to shed $1.2 billion of debt. That day, shares of AMD rose 36 cents, or 8.5 percent, to $4.59. The bump wasn’t enough to erase a previous decline caused by the credit crisis. New Castle lost at least $270,000, according to calculations based on prices it paid and received for the shares.
New Castle made at least two more winning trades, on IBM and Sun Microsystems Inc. On Jan. 8, 2009, Chiesi got two calls from Moffat’s phone number, according to U.S. authorities. The next day, New Castle started buying IBM shares, amassing 222,500 from that day to Jan. 20, when IBM reported earnings that beat analysts’ forecasts. A day later, New Castle started dumping about half of its shares, making $500,000, the government says.
Moffat, a 31-year IBM veteran, allegedly helped with the Sun trade, too. He was on a team doing due diligence on the Santa Clara, California-based server-computer maker, which was up for sale, according to the Justice Department.
Talking about Sun with an unnamed associate on Jan. 26, Chiesi said, “My IBM guy said that he thinks they’re gonna beat the quarter.”
New Castle bought more than 1 million Sun shares at $3.80 to $4.28 a share on Jan. 26 and 27, when Sun reported its earnings, which did exceed forecasts. The fund sold its Sun shares and reaped $900,000, the government says.
‘Hell on Earth’
Ten months later, Chiesi’s fortunes turned. In photographs taken outside FBI headquarters in Manhattan on Oct. 16, her blond hair is cut short, she’s wearing a baggy white sweater and she appears haggard. Prosecutors asked a judge to require Chiesi to undergo drug testing and treatment as a condition of bail.
“It’s not an issue in the case,” Kaufman, Chiesi’s lawyer, says.
Chiesi’s mother, Gloria, says her daughter is innocent.
“She is the most honest person in the world,” she says. “She is beautiful inside and out.”
Danielle’s situation is terrible, though, Gloria says.
“This is hell on earth,” she says.
It could become hell for more people if the government’s insider-trading investigation widens. If that happens, the probe is unlikely to turn up anyone who did the job with Chiesi’s enthusiasm. Unless they get swept up in the case, the men who sell silicon chips and software will miss the exuberant blonde who lit up the dance floor at those industry events.
COMMENTARY: I normally don't print an entire article of this length, but I would not be able to sleep well tonight if I left out any delicious details of Danielle Chiesi exploits, and how she brought down Raj Rajaratnam, the founder of The Galleon Group, a high flying New York hedge fund
Her story reads like something out of a Wall Street novel. Sort of reminds of you of that scene in the film "Wall Street" when Gordon Kekko (Michael Douglas) tells Bud Fox (Charlie Sheen), "Get me information." This story has sex, sizzle, intrigue, drama, betrayal, everything that you would want in a film. I bet somebody is writing that script right now.
In plain language, Danielle Chiesi is one diabolical, backstabbing, greedy, career driven bitch who would go to whatever lengths were necessary, including sleeping with her informants, to obtain insider trading information for her bosses at New Castle Funds, LLC, a Manhattan hedge fund where she worked as an analyst and later for the notorious Raj Rajaratnam, founder of The Galleon Group.
On January 19, 2011, Ms Chiesi pleaded guilty of providing insider trading information in the U.S. federal case against the notorious hedge fund "King of Kings" Raj Rajaratnam, the founder of The Galleon Group, the high flying Manhattan hedge fund. Chiesi, 45, said during a 30-minute plea proceeding in U.S. District Court in York, said:
"I am deeply ashamed by what I did. By crossing the line on those occasions, I ruined a 20-year career in my field and brought disrepute to what was an honorable profession. I apologize to the court and I take full responsibility," she said, adding that "this guilty plea causes me great pain."
Chiesi wore a dark pant suit and white blouse, and cried as her mother, sister and two nieces watched from the public benches. Here's a link to a YouTube video about her court date.
She admitted to three counts of conspiracy to commit securities fraud before U.S. District Judge Richard Holwell. The same judge is presiding over the criminal trial of Rajaratnam starting on February 28.
A key defendant in the Galleon hedge fund insider trading case pleaded guilty to criminal charges on Wednesday, tearfully admitting to "crossing the line" by leaking information on stocks including IBM and Advanced Micro Devices.
Danielle Chiesi, a former hedge fund trader, was arrested along with Galleon hedge fund founder Raj Rajaratnam in October 2009 in what officials call the biggest probe of insider trading at hedge funds in the United States.
Chiesi is accused of providing Rajaratnam with some of the confidential information that the government accuses him of trading on -- evidence gathered in secretly recorded telephone conversations between them and others in a long-running probe of the industry. Her guilty plea comes a month before Rajaratnam goes on trial.
Chiesi, who used to work for New Castle Funds LLC, could serve up to four years in prison under the terms of a plea agreement. Her lawyer, Alan Kaufman, said outside the courtroom that Chiesi had not agreed to cooperate with the government in the Galleon probe and that prosecutors had not asked her to.
The judge said Chiesi signed a plea agreement that includes prison sentence guidelines of 37 months to 46 months.
Prosecutors alleged after her October 16, 2009 arrest that she made about $4 million in illegal profits, but on Wednesday, her lawyer said she did not trade for her own account and that her eventual forfeiture would be "a very, very low number."
Kaufman, of Kelley Drye & Warren LLP, said in a statement that Chiesi passed on confidential information to Kurland, her boss at Castle. Kurland "authorized trades for the hedge fund. She did not trade for her own account," Kaufman said.
Sentencing was set for May 13, 2011.
The case is USA v Raj Rajaratnam and Danielle Chiesi, U.S. District Court for the Southern District of New York, No. 09-01184.