Moffat's Long IBM Journey Ends With An Insider Trading Guilty Plea

Robert Moffat Jr.'s long, strange, 31-year IBM trip from rising young star to cost-cutting kingpin to possible successor to IBM CEO Sam Palmisano ended with an insider trading guilty plea in Manhattan federal court on Monday.

The 54-year-old Moffat, a Palmisano confidant who was tapped by IBM's CEO several times to handle troubled businesses, pleaded guilty Monday in Manhattan before U.S. Magistrate Judge Frank Maas to one count of conspiracy to commit securities fraud and one count of securities fraud.

The conspiracy count carries a maximum sentence of five years in prison and a maximum fine of the greater of $250,000 or twice the gross gain or loss from the offense.

The securities fraud count carries a maximum sentence of 20 years in prison and a fine of $5 million. Moffat is scheduled to be sentenced on July 26 by U.S. District Judge Naomi R. Buchwald.

The government is also seeking "forfeiture from Moffat of the property that constitutes or is derived from proceeds traceable to the commission of the offenses charged."

Moffat was senior vice president and group executive for IBM's $20 billion hardware business until he was arrested last October in what federal authorities are calling the largest alleged hedge fund insider trading case ever.

The case, which marks the first time that court-authorized wiretaps have been used to target insider trading on Wall Street, allegedly netted $20 million in illegal profits, according to the Manhattan U.S. Attorney's office.

Preet Bharara, U.S. Attorney for the Southern District of New York, in a prepared statement, characterized Moffat as a senior executive at a Fortune 500 company who "willfully ignored his professional and legal responsibilities by secretly feeding inside information to his friend."

His "friend" was Danielle Chiesi, who at the time of the inside information "conspiracy," worked for New Castle Partners, an equity hedge fund group affiliated with JPMorgan Chase & Co.

NEXT: The Smoking Gun -- Chiesi Wiretaps

Specifically, in September 2008, Bharara says that Moffat provided Chiesi with inside information relating to IBM's and Lenovo's performance in the companies' respective fiscal quarters ending in September 2008.

At the time, Moffat was a senior vice president and group executive in IBM's Systems and Technology Group and a non-voting member of Lenovo's Board of Directors.

Moffat also provided Chiesi in August/September 2008 with inside information relating to a business deal pursuant to which AMD would spin off its manufacturing business into a separate entity.

Moffat was involved in the deal because AMD needed to obtain a license from IBM in connection with the deal in order to use certain IBM technology.

The most damaging information against Moffat came from court authorized wiretaps including a call with Chiesi on August 22, 2008 in which Moffat boasted that there was "zero" chance that the AMD deal would not happen.

What's more on Sept. 22, 2008, during another phone call that was intercepted by the Government, Moffat told Chiesi that AMD was going to "try to announce [the deal] by 10/10," referring to Oct. 10, 2008. On Oct. 7, 2008, AMD announced the deal.

Bharara said the Inside Information provided to Chiesi was in "breach of fiduciary and other duties of trust and confidence" that Moffat owed to IBM and Lenovo.

Moffat made his mark at IBM dealing with troubled businesses. The one time senior vice president and group executive of IBM's Personal and Printing Systems Group played a critical role in the sale of IBM's long troubled PC business to Lenovo in a $1.75 billion deal in May 2005. He also played a major role in the sale of IBM's printing business to Ricoh in 2007 for $725 million.

Moffat's biggest contribution at IBM may have been his aggressive overhaul of the one-time largest computer company's arcane supply chain to the tune of billions of dollars in savings. As the senior vice president of Integrated Operations, Moffat was responsible for reviewing IBM's complex supply chain and finding cost savings.

That ultimately led to major cost-cutting initiatives which did not always make him the most popular executive among rank and file IBMers.

Indeed, one union official seeking to represent IBM employees, claimed there was cheering in the halls of IBM when news about Moffat's arrest came last year.

Moffat is still featured on IBM's Website in old annual reports and even in a 2009 document titled "The Smarter Supply Chain Of The Future. Global Chief Supply Chain Officer Study."

"Cheaper, faster, better is " and has been " the mantra among supply chain executives," says Moffat in the introduction to the study.

Moffat's guilty plea marks the 11th conviction in the ongoing insider trading investigation. And the case is not over.

Mr. Bharara, who praised the investigative work of the FBI and thanked the U.S. Securities and Exchange Commission (SEC) for its assistance, said that the investigation is continuing.