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IBM Exec on Leave in Massive Trading Scandal

IBM on Monday confirmed that it had placed Robert Moffat, Jr., a senior vice president and head of the company's cornerstone systems and technology group, on temporary leave after he was arrested Friday for his alleged role in a massive insider-trading scandal.

Moffat, according to Preet Bharara, U.S. attorney for the Southern District of New York, was a prominent player in the largest hedge-fund insider trading case ever charged.

Using wire taps and other sophisticated surveillance and investigative techniques, the government uncovered an elaborate scheme in which Moffat allegedly dispensed inside information about IBM (NYSEL IBM) and its partners to other defendants including Danielle Chiesi, an employee at New Castle Funds LLC, a White Plains, N.Y.-based firm that advised several prominent hedge funds and was formerly a part of Bear Stearns Asset Management group.

"This is not a garden-variety insider trading case," Bharara said, according to a Reuters report of Friday's press conference announcing the bust.

An affidavit filed in New York claims Moffat and other co-conspirators exchanged information about a number of high-profile technology stocks including Advanced Micro Devices, Intel, Akamai Technologies, Google, Clearwire, Hilton Hotels, PeopleSupport, Polycom and Sun Microsystems.

Prosecutors allege the illegal trading activity dates back to sometime in 2006.

Along with Moffat and Chiesi, law enforcement agents arrested a handful of other executives including Raj Rajaratnam, founder of $3 billion-plus hedge fund Galleon Group, as well as Rajiv Goel, Intel's treasury management director, and Anil Kumar, a director at management consulting firm McKinsey & Co.

Intel (NASDAQ: INTC) placed Goel on administrative leave and initiated its own investigation into the allegations, according spokesman Chuck Malloy.

IBM officials were quick to respond to the arrest.

"In view of a U.S. federal investigation into his personal activities, Mr. Moffat has been placed on temporary leave of absences and is no longer serving as an officer of IBM," the statement said.

IBM said Rod Adkins, senior vice president in charge of development and manufacturing, will now serve as acting leader of IBM's systems and technology group.

Federal prosecutors are accusing Moffat of passing on insider information garnered during business negotiations with AMD (NYSE: AMD) to Chiesi as well as information about IBM and Sun Microsystems (NASDAQ: JAVA). The FBI claims Moffat was one of the IBM executives responsible for conducting due diligence reviews of Sun ahead of a possible acquisition.

Ironically, IBM is one of the industry's leaders in governance, compliance and risk management software sales.

As if this latest scandal wasn't enough to keep its attorneys busy, Big Blue earlier this month learned it was the subject of an antitrust inquiry into its mainframe business practices. Federal investigators are looking into allegations that the company for years systemically squeezed out competitors to its highly profitable mainframe business.

Technology companies have found themselves in the crosshairs of numerous executive scandals in the past five years. In August 2007, former Brocade Communications CEO Gregory Reyes was convicted and later sentenced to 21 months in prison for his role in a stock option backdating scandal. The conviction was later set aside due to a finding of prosecutor misconduct, but according to reports, federal prosecutors are weighing whether to retry Reyes.

CA suffered through a series of embarrassing and illegal managerial missteps in the late 1990s and early 2000s, while Apple became the subject of a backdating lawsuit that was later dismissed.

IBM shares were up $1.34, or 1 percent, to $122.98 in Monday afternoon trading.

Update corrects status of Reyes' conviction.