Insider Trading Scandal Involves IBM & Intel

It isn’t often that big blue gets a black eye.

But on Friday IBM (NYSE: IBM), the leading U.S. technology firm known for its conservative management, found itself entangled in the largest ever hedge fund insider-trading scheme involving Galleon Group founder Raj Rajaratnam.

Robert Moffat, senior vice president and head of IBM’s systems and technology group was named as a defendant. Executives at leading chipmaker Intel Corp (NASDAQ: INTC) and management consulting firm McKinsey & Co. were also implicated.

Bob Djurdjevic, an Annex Research analyst who has been covering IBM for over 30 years and is himself a former employee, said the news came as a shock.

“If there’s any company that’s always been a model of pristine behavior, being above it all, it was IBM,” he said.

“I don’t think it will have an effect on IBM’s business because it has deep talent. However, it is a black eye to IBM’s reputation.”

The charges, stemming from wiretaps, included accusations that Moffat passed on to hedge fund New Castle Group insider information on Advanced Micro Devices Inc, obtained through IBM’s business negotiations with the company.

He is also accused of passing on information on IBM itself ahead of the company’s quarterly results, as well as those of Sun Microsystems while IBM was looking at its books for a possible acquisition. The FBI said Moffat was one of the IBM executives conducting due diligence on Sun.

Rajaratnam is also accused of conspiring with Rajiv Goel, director of strategic investment at Intel’s investment arm, and Anil Kumar, a director of powerful management consulting firm McKinsey & Co.

Daniel Lazaroff, business law professor at Loyola Law School, said the case showed how widespread insider trading was, and that often the risk and penalty of getting caught was often not enough to deter them.

“The lesson for these companies is to try to internally monitor what is going on and make it clear that separate and apart from federal or state laws they are going to deal very harshly with these people from an employment standpoint,” he said. “And they should have compliance systems in place.”

Coincidentally, IBM sells software to aid companies’ compliance policies and prevent insider fraud as part of its portfolio of technology services, software and servers.

The case adds to IBM’s recent headaches. The U.S. Justice Department said last week that it was investigating allegations that IBM abused its dominance in the mainframe servers market to squeeze rivals.

The news also comes a day after IBM announced quarterly results that beat expectations but disappointed some investors who were not happy with some of the numbers, including a drop in service contract signings, an indication of future sales.

IBM declined to comment. McKinsey said it was “distressed” to learn that Kumar had been arrested, and was looking into the matter. Intel said it was not aware of the case until Friday and had not been contacted by authorities.