How A Harvard MBA Traded On Inside Info

Barai, apparently thinking that he could beat the Feds to any possible evidence against him, then told Pflaum to delete all the emails from contacts at Primary Global.

“I deleted mine,” he said.

The back-and-forth text messages seem to belie whatever anxiety Barai had to be feeling at the time. After telling his associate to shred documents and delete emails, Barai then seemed to put on a good show that the investigators would never get either of them.

“So what if we talked to anyone,” Barai said, referring to another hedge fund manager also implicated in the insider trading scandal.

“They need proof that we acted on something and it’s hard to have that. My sense is they tapped the firm just recently. The more I think about it—just not enough clues to hold something on us. There isn’t anything tho. Nothing material. We use all mosaic theory so we’re ok.”

Mosaic theory allows an analyst to place a value on a security using an array of sources, both public and nonpublic. Barai seemed to be trying to reassure himself and his associate that they would be able to get away with it.

“Let’s not worry. Forget the past. No proof. So ur fine. BTW – we did mosaic theory,” he repeated into his Blackberry. “We always do.”

As it turned out, Barai had plenty to worry about—especially because he had put complete trust in Pflaum, who had been cooperating with investigators. Pflaum was one of Barai earliest employees, coming aboard less than three months after Barai launched his hedge fund in a midtown Manhattan office near Citigroup’s headquarters. When he opened the firm in January of 2008, it was with a Hindi prayer service to bless his new company.

Not much more than two months after joining Barai Capital, Pflaum participated in a telephone conference call on May 23, 2008, to discuss an upcoming quarterly earnings announcement from semiconductor maker Marvell Technology. Marvell was scheduled to report the numbers six days later. Barai had asked Pflaum to listen in and take notes of the telephone call, presumably because of Barai’s hearing problems.

At 2:17 p.m. on May 23, Barai called Jiau, his contact at Primary Global, in California. Jiau, an American-born Taiwanese, had earned a master’s in statistics at Stanford University.

In a phone call lasting some 43 minutes, Jiau said that Marvell’s revenues for the quarter would come in at $805 million and that the company’s gross margin would be about 53%. Pflaum dutifully took notes of the conversation on his laptop computer. That same day, according to the government, Barai bought more than 300,000 shares of Marvell for some $4.4 million.