An analyst at the hedge fund Citadel LLC told FBI agents he made millions of dollars trading on information from a Dell Inc. (NASDAQ:DELL)’s insider.

Citadel: Insider information in 2008 and 2009

According to a Bloomberg report from Neil Weinberg, David Glovin and Patricia Hurtado, in December 2011, agents at the FBI began questioning a Citadel analyst about a friendship he had formed with a Dell Inc. (NASDAQ:DELL) insider. Summarizing their interviews, the FBI agents wrote in a confidential report that the Citadel analyst received market-sensitive information from the Dell employee in 2008 and 2009. The analyst told the agents that in one trade he made $5 million to $6 million when he bet against Dell after learning it would announce disappointing earnings.

Though nine people at five investment firms were eventually convicted in part for trading on tips from inside Dell Inc. (NASDAQ:DELL), neither the analyst, Richard Farmer, nor the Dell employee, Rob Ray, was sued by regulators or prosecuted.

Citing documents reviewed by Bloomberg, Neil Weinberg, David Glovin and Patricia Hurtado report the FBI documents recap agents’ interviews with both Farmer and Ray. These documents reveal how authorities mounted their insider-trading investigation starting in 2007, an effort that led to over 80 convictions, brought down at least five hedge funds and resulted in over $2 billion in payments from defendants.

Citadel Dell
Chart via BloombergBriefs

Erased notes

According to a testimony from Sandeep “Sandy” Goel, a Wall Street analyst, former Dell Inc. (NASDAQ:DELL) employee Rob Ray shared tips with Goyal, who in turn passed along the information to others. The government used their testimony to build part of its case against several hedge-fund managers. Both Farmer and Ray have since left their jobs.

According to the FBI agent’s summary, both Farmer and Goyal got what they believed was non-public information from Ray ahead of Dell Inc. (NASDAQ:DELL) announcements. In his interview with the FBI agents, Goyal said Ray had spoken of being contacted by a Citadel employee, Farmer, who “was very aggressive” and “trying to get numbers and data points from Ray”.

In his interview with the FBI, Ray revealed Farmer would provide a gross margin range, such as 17% to 18%, and Ray would say more specifically what the margin would be. Farmer also said in his interview with the FBI he had asked Ray if operating margins “could be worse than ‘X’”. The analyst also recalled that he used Ray’s tips in the summer of 2008, which enabled to rake in $5 million to $6 million when Dell Inc. (NASDAQ:DELL)’s shares dropped 15 to 18%.

The FBI agents also wrote in their summary that Farmer benefited before Dell Inc. (NASDAQ:DELL)’s 2009 meeting with analysts, as Ray had “volunteered that there was margin pressure”. This information helped Farmer to short Dell and gain a six-figure profit, when the news became public.

When Farmer returned from a trip in late 2009, he erased all electronic notes, in Microsoft Word format, that were stored on thumb drives, zip drives and a shared drive at Citadel. He also got rid of e-mails and threw away his handwritten notes.

Interestingly, last year, Katie Spring, a spokesperson for Citadel, said they don’t have an insider trading group at Citadel. She was reacting when Richard Lee, a former employee, apparently violated one of the firm’s policies when he was transitioning to become head of the Principal Strategies team.

As reported by ValueWalk, in August, Sahil Uppal, a former Citadel LLC employee, pleaded guilty to obstructing a probe into the theft of trade secrets from the Chicago-based investment firm.

In another incident in August, Financial Industry Regulatory Authority reportedly fined a unit of Citadel Investments $800,000 for erroneously sending orders to other exchanges.

Chart via BloombergBriefs