Moffat’s Galleon Arrest Stuns IBMers Who Recall Sumo Suit, Kilt

Moffat’s Galleon Arrest Stuns IBMers Who Recall Sumo Suit, Kilt


Oct. 26 (Bloomberg) -- Bob Moffat, the International Business Machines Corp. executive arrested in the Galleon insider trading case, used to start meetings with trivia about “This Day in History.” He’d ask if anyone knew what day it was, and then rattle off a few notable events.

On Oct. 16, Moffat had his own day in history when he was arrested in what federal prosecutors are calling the biggest insider-trading scheme involving hedge funds. The 53-year-old executive is accused of leaking information about the earnings of IBM and Sun Microsystems Inc. and a restructuring of Advanced Micro Devices Inc. to Danielle Chiesi, a consultant for New Castle Funds LLC.

A 31-year-veteran of IBM, Moffat headed the personal- computer division, helped sell that unit off, reduced the number of suppliers the company used and, until he was put on temporary leave on Oct. 19, was senior vice president overseeing the mainframe, server and storage-device businesses. Before his arrest, he was among the candidates to succeed Sam Palmisano, 58, as chief executive officer of the world’s largest computer- services company, according to people familiar with IBM’s thinking.

Moffat was not aware of the insider trading mentioned in the federal criminal complaint, nor did he financially benefit from the alleged activity, said Kerry Lawrence, his attorney.

“It’s our view that Bob did not commit any crimes or disclose any information that would lead to him having criminal liability,” Lawrence said.

‘It’s All a Mistake’

“This guy is the most honest, hardest-working IBMer, true- blue worker you will ever meet in your life,” said Joe Formichelli, a former colleague of Moffat’s in IBM’s PC unit who is now retired. “I don’t know how he got tangled up in this mess. I want to believe it’s all wrong, it’s all a mistake. I will never believe it until he’s found guilty.”

The complaint, which quotes from wiretap transcripts, describes Chiesi, 43, as a friend of Moffat’s. It relates a call on August 22, 2008, during which the two discuss a tentative and secret agreement by AMD to spin off its manufacturing operations into a joint-venture backed by AMD and the Abu Dhabi government. IBM had signed a technology licensing agreement with the new entity, Moffat said in the complaint. Chiesi asked him what the chances were that the AMD restructuring deal would fall apart.

“Zero,” Moffat allegedly said. “I see no way that it doesn’t get done.”

‘My IBM Guy’

According to the complaint, Moffat said the transaction, which would also draw a major investment in AMD from an Abu Dhabi sovereign wealth fund, would close in six to eight weeks. The complaint said that Chiesi and Rajaratnam discussed how the deal would boost AMD’s stock.

Moffat later allegedly fed Chiesi insider information about Sun, which IBM was in discussions to acquire. On Jan. 26, Chiesi called a cooperating witness to discuss what she had learned from Moffat who, according to the complaint, was conducting due diligence on Sun.

“My IBM guy said that he thinks they’re gonna beat the quarter,” Chiesi allegedly said, referring to Sun’s forthcoming earnings announcement.

New Castle and Galleon, both based in New York, lost money on their investments in AMD, whose restructuring was announced in October 2008. New Castle made a $900,000 profit on its purchases of Sun stock prior to that company’s announcement in January, of earnings that topped analysts’ expectations. The firm made a $500,000 profit selling IBM stock bought prior to that company’s earnings announcement, also in January, according to the complaint.

‘Very Surprising’

Shaw Wu, a technology analyst at Kaufman Bros. LP in San Francisco, said he couldn’t square the news of Moffat’s arrest with the archetypal IBM executive he last saw in July, at a company analyst day.

“It was very surprising,” said Wu. “He’s a company man, very careful with his answers. He knows where the line is.”

Moffat, approached for comment at his Ridgefield, Connecticut, home on Oct. 19, came to the door in jeans and a t- shirt and accompanied by a dog. He declined to comment.

IBM spokesman Edward Barbini declined to comment for this story.

Alan Kaufman, the attorney for Chiesi, said in an interview after her arrest that his client was “shocked” at her arrest and will plead innocent.

The company won’t have leadership disruptions in the hardware group, New York-based Barclays Capital Inc. analyst Ben Reitzes wrote in an Oct. 19 note, citing a meeting with Rodney Adkins, Moffat’s replacement.

‘Iron Dutchman’

Before his IBM career, Moffat was known as the “Iron Dutchman” for his stamina as a middle-distance runner. Moffat attended Union College, where the sports teams are known as the Dutchmen, and ran on the track team, according to the Schenectady, New York school’s online magazine. He won three New York state championships in the indoor 600-yard event, as well as the National Collegiate Athletic Association Division III 400-meter outdoor championship with a time of 46.8 seconds.

He graduated with a degree in economics in 1978 and, according to the Web site, was awarded the Joseph Daggett Prize in 1978, given by Union to seniors for conduct and character.

Later that year he took a job in the finance department of IBM, and began working his way up the corporate hierarchy. He earned an MBA in information systems in 1982 from Iona College in New Rochelle, New York, according to a school spokeswoman.

Palmisano

In the 1990s, he worked with Palmisano, who ran the personal systems group, which includes PCs and computer servers. The two struck up a close relationship, said a person who served with Moffat in the PC division in Raleigh, North Carolina.

“Bob was one of these guys who could get things done, and Sam knew that,” said the person, who declined to be identified. “Sam relied on Bob.”

In 2000, Palmisano became chief operating officer, and Moffat was promoted to head up the PC division, which had lost money for more than two years as the dot-com bust sapped consumer sales.

To boost employee morale, according to a former colleague, he once told workers in the Raleigh office that if the division turned a profit in one quarter, he would wear a kilt at a company event. When it did, he kept his promise. He once dressed up in a sumo-wrestler suit at a conference. While onstage at an another event, he tore up a speech a communications executive had written, saying he preferred to speak off-the-cuff.

Cost-Cutting

“He was a likeable guy,” said the person. “And very effective at looking at cutting costs.”

By the end of 2000, he had helped cut $1 billion from the PC business.

“There’s no tears being shed for his arrest,” said Lee Conrad, national coordinator for Johnson City, New York-based Alliance@IBM, an IBM worker group. “He’s been responsible for thousands of job cuts. He seemed to symbolize the model, ‘Greed is good.’”

Palmisano, who became CEO in 2002, charged Moffat with consolidating the company’s network of suppliers to further cut costs. Moffat started by trimming inventory and manufacturing expenses by giving faster data to parts suppliers and by standardizing parts across different products. He later helped orchestrate the $1.75 billion sale of the remaining PC businesses to China’s Lenovo Group Ltd. in 2005.

‘Huge Coup’

In 2008, Palmisano elevated Moffat to senior vice president of the systems and technology group, the job he had until last week. The unit had $19 billion in revenue that year.

By August 2008, according to the criminal complaint, Moffat began feeding insider information to Chiesi.

In September, Chiesi discussed the value of Moffat’s IBM information with Rajaratnam.

“As long as he’s there, I need those f-----g numbers,” Chiesi said, according to the complaint. “I need to be right on this stock. He’s a huge coup for me, having him at IBM.”

The former track star lives with his wife, Amor, in an 8,000-square foot colonial home bought in 2002. The couple has four children -- three sons and a daughter. His oldest son ran track for the University of North Carolina at Chapel Hill, and his daughter played softball for Georgetown University. Moffat owned about $3 million in IBM stock as of August, according to Bloomberg data.

“It’s so out-of-character,” said Formichelli of the insider-trading allegations against Moffat. “You want to say, ‘No, not Bob.’ I don’t think he’s the kind of guy who would take a pencil home.”

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