The United States government has accused Robert Moffat, IBM’s server chief, the guy who was negotiating to buy Sun, with betraying Sun’s financial position to Danielle Chiesi, an employee of New Castle Partners, a New York hedge fund, so she could trade on the insider information.
Moffat knew what Sun’s numbers were going to be because he was one of the nine IBMers doing due diligence at Sun this past January.
In a wire-tapped phone call Chiesi made to an unidentified person now cooperating with the government’s investigation she said, “IBM is looking at it as a takeover. The only reason my guy would know that is because it’s his deal. Like, he’s in bed with them….You see what I mean…not because he’s just speculating.”
The news that IBM was negotiating to buy Sun didn’t leak to the Wall Street Journal and hence to the world for another two months.
Armed with the foreknowledge allegedly provided by Moffat that Sun was going to beat the Street – top and bottom – when it reported its December ’08 quarter, New Castle bought Sun shares just hours before Sun posted its numbers on January 27 and made a $900,000 killing on the deal.
The government says Moffat had practice slipping Chiesi insider financial information. When the global economy started melting down last year, he had dinner with her in early September, before IBM’s quarter closed, and reassured her that IBM would pull it out. According to a taped phone call with an unidentified affiliate of New Castle, she said, “He’s saying, you know, [IBM’s] zSeries looks really good. He’s saying that everything looks fine but…it comes down to the…final last week. But he thinks right now that they are on track. As of right now he’s not even worried a little bit, I mean, we think we can beat the numbers this quarter.” Chiesi apparently held onto her position in IBM’s stock.
Then again this past January, when IBM was due to report the results of its December quarter and Chiesi had spoken with Moffat New Castle covered a short position in IBM stock and began picking up more shares.
The government tap found her explaining to the person who’s now a government witness, “I’m buying IBM going into the print,” Wall Street parlance for IBM posting its numbers. “If I wasn’t closer to the situation I’d be, I would so short this fucking thing. But I’m thinking they could beat, and they really could guide up….You know, my guy said easily they could, they could add 30 cents to the bottom line. Easily, easily. That’s what he says, to the bottom line in ’09….I don’t think anybody is talking about a beat this quarter.”
The government’s complaint notes that on January 20 IBM’s Q4 earnings beat analyst expectations by 25 cents and that it expected to do 27 cents better this year than last.
The FBI figures New Castle was up about $500,000 on Moffat’s information.