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  - July 13, 2010 -  

Supply Chain News: Understanding IBM’s Bob Moffat’s Strange Fall – Cherchez La Femme!


Credited with Integrating IBM’s Vast Supply Chain, CEO Candidate Made not One Dollar from the Insider Trading Scandal that will Send him to Jail – but Receiving Other Benefits Counts Too

 
     
     
  by SCDigest Editorial Staff  
     
 
SCDigest Says:
Over time, Moffat gave Chiesi pieces of information, sometimes almost accidentally, it appears.

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This week, Fortune magazine released an in-depth article trying to make sense of the fall of Bob Moffat, a highly respected IBM executive who had led the 10-year effort to integrate IBM’s vast global supply chain into a single organization – and as a result became one of the most prominent supply chain executives in the industry. Last year, he was arrested in an insider trading scandal that focused on hedge fund manager Raj Rajaratnam of the Galleon fund. (See Bob Moffat of IBM Leaves Company in Wake of Insider Trading Scandal.)

 

As part of the research for the story, Fortune writer James Bandler interviewed SCDigest editor Dan Gilmore about a variety of supply chain topics. The full Fortune article can be found here: Dangerous liaisons at IBM: Inside the biggest hedge fund insider-trading ring.) A summary can be found below.

 

When Bob Moffat’s arrest was announced last October, it didn’t seem to make much sense on the surface. Why would a successful, highly paid executive at IBM, with numerous CEO opportunities ahead of him, maybe at Big Blue itself, get involved in insider trading?

 

Bandler notes the disconnect so many sensed.

 

While the insider trading scandal in general “seemed to many people a confirmation of all they've suspected is wrong with Wall Street and the hedge fund industry, Moffat's arrest was utterly shocking to the people who knew him,” Bandler wrote. “He wasn't a speculator. He was a confidant of IBM CEO Samuel Palmisano and widely considered a candidate to succeed him. He had plenty of money and a family who adored him. On so many levels it didn't compute.”

 

The easy answer – it wasn’t about the money, it was about the girl.

 

Moffat had come from relatively modest beginnings, but rose quickly through the IBM ranks after he was hired as a programmer in 1978.

 

Before he died earlier this year, legendary financial executive Jerry York, who spent some time as IBM’s CFO, told Fortune that Moffat "was highly regarded and considered to be a real comer” at a young age.

Bandler says that in the mid-1990s, York, a famously tough boss, had a difficult inventory management task for Moffat. Assigning him the job, York produced a sheet of paper and said, "Please sign this." The document said that if Moffat didn't have the problem fixed by the year's end, he would agree to resign immediately. Moffat signed it without hesitation, Bandler says – and kept his job.

Moffat first gained tech industry fame turning around IBM’s troubled PC division, which had been consistently losing money.

He was a protégé of Sam Palmisano, another long-time IBM executive who eventually became CEO. Shortly after moving to the top post, in 2002 Palmisano asked Moffat to turn IBM’s far flung and decentralized approach to supply chain into a single, integrated global organization.

The total effort took years, but Moffat cut out some $5.6 billion in supply chain costs the first year on the job.

“His team built a system to track every silicon chip, diode, and widget in IBM's supply chain from purchase to sale,” Bandler says. “Later Moffat devised an ingenious, albeit spooky, system for including humans in the supply chain too -- categorizing each employee's skills and strengths.”

With that success behind him, Moffat took a job running IBM’s huge systems and technology group.

He was rumored to be a candidate to become IBM’s CEO one day, and had already turned down CEO slots at other tech companies.

Life was good – until FBI agents showed up at his house early in the morning on Oct. 16, 2009 to arrest him. His shocked wife told them he had already left for work.

Fatal Attraction

About the same time he took over the supply chain assignment, Moffat had been introduced to a beautiful Wall Street player named Danielle Chiesi by IBM’s then CFO John Joyce. At the time, Chiesi worked for a hedge fund named New Castle, which was owned by investment bank Bear Sterns, whose collapse in 2008 was one of the key events of the financial crisis.

Though a mid-level employee both at New Castle and in previous jobs, the former beauty queen was well known for cultivating relationships with high ranking executives both within the financial industry and in high tech company circles. As just one of many examples, Hector Ruiz, the CEO of chip giant AMD, was known to go to wine and cheese parties at her modest New York apartment.

When she had ask IBM CFO Joyce introduce her to an “IBM up and comer,” Joyce obliged by making a connection for her to Moffat.

Chiesi’s trade was networking like crazy to gain information that might be useful for trading. When it comes to insider trading situations, just where legitimate networking and information sharing ends and illegal insider trading begins is often not clear. It appears she benefited her contacts in turn with information and introductions useful to them.

She met Moffat – and made a big impression with him on their first encounter, as she had with many others.

For Chiesi, Moffat “was a perfect contact. As head of the global supply chain, he spoke regularly with the biggest technology companies in the world, both vendors and customers. He had the ear of the CEO,” Bandler writes.

 

(Supply Chain Trends and Issues Article - Continued Below)

 

 
 
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Within a year, the relationship turned from the flirty-level approach Chiesi often used with contacts to a full blown affair with the long-married Moffat.

Over time, Moffat gave Chiesi pieces of information, sometimes almost accidentally, it appears. There was news passed about AMD’s plans to spin off its manufacturing operations in a joint venture, which would also benefit IBM through a license deal for some its technology. He told her about a potential deal in which IBM would takeover rival computer maker Sun. New Castle meanwhile, was buying millions of AMD shares on the tip.

So, unfortunately for Moffat, was Raj Rajaratnam of the Galleon fund. Chiesi was also funneling information to Rajaratnam in addition to her boss at New Castle – and Rajaratnam had been under investigation by the Feds since 2007. His phone calls and eventually those of others were being recorded. Moffat, as well as executives at McKinsey, Intel and others, were implicated through the taped calls.

Moffat resigned his position at IBM following his arrest. He estimates he lost some $65 million in stock options and retirements income as a result. He has pled guilty to just two counts of insider trading and securities fraud, and is free on bail awaiting sentencing. Prosecutors are recommending the lightest sentence allowed of just six months in jail.

His wife Amor has stuck with him, though after years of remission her MS symptoms have recently flared up with a vengeance, which likely has been caused by the stress of all this.

Chiesi was also indicted and is debating whether to fight the charges in court or try to work out a plea deal. Numerous others have pled guilty or must make similar decisions.\

Amount of money Moffat made for his role in the insider trading scheme – nothing. The two hedge funds actually lost money on the AMD trade, though made some millions on information obtained in other deals. Unfortunately for Moffat, to gain a conviction, the government didn't need to prove that Moffat had profited financially, only that he had obtained a benefit of some kind.

“The affections of a comely woman qualified,” Bandler writes.

"Everyone wants to make this about sex,” Moffat recently told Bandler. “Danielle had an extensive network of business people. And she added clarity about what was going on in the business world...I know in my heart what this relationship was about: clarity in the business environment."

Moffat says he is going to write a book about the whole story soon.

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