WHEN: TODAY, NOVEMBER 23RD AT 12PM ET
WHERE: CNBC'S "THE STRATEGY SESSION"
The following is an unofficial transcript of a CNBC EXCLUSIVE interview with John Kinnucan, Founder of Broadband Research LLC, on CNBC's "The Strategy Session" today, November 23rd.
All references must be sourced to CNBC.
DAVID FABER, HOST: WE START THE BROADCAST TODAY WITH SOME BREAKING NEWS OF OUR OWN. JOHN KINNUCAN, THE MAN WHO WOULDN'T TALK TO THE FEDS AS THEY CONDUCT AN INSIDER TRADING PROBE IS ABOUT TO TALK TO US. KINNUCAN RUNS BROADBAND RESEARCH, IT'S A BOUTIQUE RESEARCH FIRM SPECIALIZING IN VARIOUS-- WELL, INFORMATION IN THE TECHNOLOGY INDUSTRY, PROVIDING THAT INFORMATION TO BOTH HEDGE FUNDS AND MUTUAL FUNDS. HE REFUSED THE REQUEST FROM FEDERAL AUTHORITIES TO WIRETAP HIS CUSTOMERS AND IMMEDIATELY TOLD THOSE CUSTOMERS ABOUT THE APPROACH. THE CONTINUING INVESTIGATION IS FOCUSED IN PART ON THE ROLE OF RESEARCH FIRMS LIKE KINNUCAN'S AS WELL AS SO-CALLED EXPERT NETWORKS AND WHETHER THOSE FIRMS MAY BE CROSSING THE LINE IN FINDING AND PROVIDING MATERIAL, NON-PUBLIC INFORMATION, TO THOSE WHO WOULD TRADE ON IT. MR. KINNUCAN JOINS US NOW IN ANOTHER "STRATEGY SESSION" EXCLUSIVE. JOHN, THANKS FOR BEING WITH US. I'D LOVE TO START OFF, WHAT WERE THE FEDS AFTER WHEN THEY APPROACHED YOU? HOW DID THEY GET TO YOU AND WHAT WERE THEY LOOKING FOR?
JOHN KINNUCAN: WELL, THAT'S NOT ALL ENTIRELY CLEAR TO ME. I CAN TELL YOU THEY PULLED UP IN FRONT OF MY HOUSE WHEN I WAS OUT ON THE FRONT PORCH ABOUT 4:00 IN THE AFTERNOON HAVING A GLASS OF WINE. MAY SEEM A LITTLE EARLY TO YOU, BUT I GET UP AT 3:00 IN THE MORNING.
FABER: IT'S OKAY. WINE'S GOOD ANY TIME. I'M A FAN OF THAT. GO AHEAD.
KINNUCAN: I FIGURE AFTER 12 HOURS, I'M ENTITLED. ANYWAY, A COUPLE OF SUITS JUMPED OUT OF THE SEDAN IN FRONT OF MY HOUSE AND THEY WEREN'T PORTLAND SUITS. THEY WERE DEFINITELY NEW YORK SUITS. SO IT WAS A LITTLE BIT LIKE A FLYING SAUCER LANDING IN THE HOOD. AND THEY IDENTIFIED THEMSELVES AND SAID THEY WANTED TO TALK TO ME. SO I INVITED THEM INTO MY KITCHEN. AND THEY IMMEDIATELY STARTED RATTLING OFF A BUNCH OF MY RESEARCH AND INSINUATING THAT IT WAS IMPROPER AND IT WAS A LITTLE BIT SURREAL BECAUSE THEY WERE RATTLING OFF STUFF THAT CROSSES, SAY, BRIEFING.COM ALL DAY LONG AND IS NO DIFFERENT THAN THE STUFF THAT'S PUBLISHED BY THE MAJOR BANKS AND YOU CAN FIND ON BARON'S TECH TRADER DAILY, NUMEROUS PLACES. AND IN ANY CASE, THEY SAID THERE WAS A VERY LARGE INSIDER TRADING RING INVESTIGATION THAT THEY WERE CONDUCTING AND ONE OF MY CLIENTS WAS A FOCUS ON THE PROBE AND THEY WANTED MY HELP IN BASICALLY INCRIMINATING THIS INDIVIDUAL. AND AT THAT POINT I SAID, WELL, MY WIFE AND KIDS ARE ABOUT TO COME HOME FROM SCHOOL. I THINK WE NEED TO WRAP THIS.--
FABER: WRAP IT UP.
KINNUCAN:YEAH, I SAID, I NEED TO WRAP THIS UP BECAUSE MY WIFE AND KIDS ARE ABOUT TO ARRIVE HOME. AND SO THEY SAID, WELL, OKAY, HERE'S OUR CARD, WE NEED TO HEAR FROM YOU IN 48 HOURS. IF WE DON'T, THERE WILL BE TROUBLE FOR YOU.
FABER: WELL THEY HAVEN'T MADE TROUBLE FOR YOU, I GUESS, HAVE THEY?
KINNUCAN: WELL, MY BUSINESS HAS BEEN DESTROYED, SO I GUESS TO A CERTAIN EXTENT, THEY HAVE.
FABER: WHO WAS THE CLIENT? CAN YOU TELL US THAT OR IS THAT SOMETHING YOU DON'T WANT TO SHARE?
KINNUCAN: NO, I WAS WARNED NOT TO DISCLOSE THAT, OTHERWISE I WOULD BE GUILTY OF OBSTRUCTION OF JUSTICE.
FABER: AND YOU SAY YOUR BUSINESS HAS BEEN HURT BY THIS. HOW SO?
KINNUCAN: WELL, AS YOU CAN IMAGINE -- WELL, FIRST OF ALL, I HAVE CONTRACTS WITH MY CLIENTS THAT IS IF I'M BEING INVESTIGATED BY ANY GOVERNMENT AGENCY, I NEED TO DISCLOSE THAT IMMEDIATELY AND ALSO -- IT'S ESSENTIALLY -- AS YOU CAN IMAGINE, IT'S IMPOSSIBLE TO HAVE A BUSINESS ON WALL STREET IF YOU'RE UNDER INVESTIGATION BY THE FBI. AND IT REMINDS ME A LITTLE BIT OF ARTHUR ANDERSEN. THE COMPANY'S BEEN INDICTED, THEY'RE OUT OF BUSINESS. I HAVEN'T BEEN INDICTED. BUT IT'S A DISTINCTION WITHOUT DIFFERENCE IN THIS CASE.
FABER: JOHN, WHAT I WONDER IS WHETHER YOU WERE NOT ONE OF MANY PEOPLE WHO WERE APPROACHED SIMILARLY BY THE FBI AND ASKED SIMILAR QUESTIONS AND PERHAPS CHOSE TO BEHAVE DIFFERENTLY IN THE SENSE OF THERE MIGHT BE PLENTY OF GUYS WEARING WIRES, TAPING CUSTOMERS WHO THEY'RE HAVING CONVERSATIONS WITH. DO YOU HAVE ANY SENSE FOR THAT?
KINNUCAN: WELL, I'VE GOTTEN THAT CLEAR INDICATION FROM SOME PEOPLE I'VE SPOKEN TO, VARIOUS REPORTERS WHO ARE OF THAT BELIEF, THAT THEY'VE BEEN GOING AROUND THE COUNTRY AND VISITING A NUMBER OF PEOPLE AS THEY DID WITH ME.
FABER: BUT OBVIOUSLY YOU DON'T KNOW THAT TO BE THE CASE, GIVEN YOU HAD ONLY HAD YOUR ONE CONVERSATION WITH THE FBI.
KINNUCAN: THAT'S RIGHT.
GARY KAMINSKY, HOST: JOHN, TWO QUESTIONS HERE. CAN YOU DESCRIBE TO US EXACTLY WHAT IT IS THAT YOU DO AND KIND OF COMPARE THAT TO THE VIEWERS IN TERMS OF WHAT IS GENERAL SELL-SIDE RESEARCH? WHAT IS THE PRODUCT YOU'RE SELLING? AND SECONDLY, IT'S NOT JUST HEDGE FUNDS THAT YOU HAVE AS CLIENTS. MANY OF THE MUTUAL FUNDS, THE PUBLICLY TRADED COMPANIES ARE YOUR CLIENTS AS WELL, CORRECT?
KINNUCAN: THAT'S RIGHT. SO WHAT WE DO IS WHAT'S GENERALLY KNOWN IN THE BUSINESS AS CHANNEL CHECKS. SO I HAVE A VAST NETWORK OF PEOPLE, MOSTLY AT PRIVATE RESELLERS, VALUE-ADDED RESELLERS, WHO I'VE BUILT THIS NETWORK OVER 11, 12 YEARS, SINCE I'VE BEEN IN BUSINESS, WHO KEEP ME ABREAST OF CHANGES, PRODUCTION LEVEL CHANGES OR DESIGN WINS AS SOMEBODY -- MARVEL MAY HAVE WON A DESIGN OR LOST A DESIGN OR THEY'RE TAKING UP THEIR WAFER STARTS AT TSMC, FOR INSTANCE. ONE THING I THINK THAT NEEDS TO BE ADDRESSED HERE -- I CAN GIVE YOU AN EXAMPLE, I SIGNED UP A NEW CLIENT IN LATE AUGUST, HAD ABOUT AN HOUR-LONG COMPLIANCE CALL WITH THE FIRM. AND TOWARDS THE END, THE CEO CAME ON AND SAID, JOHN, DO YOU TRAFFIC IN THESE APPLE PRODUCTION DATA, THE iPHONE PRODUCTION FORECAST WENT UP 500K THIS WEEK OR THE iPAD NUMBER HAS CHANGED BY A CERTAIN AMOUNT --
FABER: TO BE CLEAR, JOHN, A LOT OF FIRMS PROVIDE THIS INFORMATION NOW, INCLUDING BIG SELL-SIDE FIRMS, CORRECT?
KINNUCAN: WELL, BASICALLY IT'S MY BELIEF THAT YOU CAN'T BE A SUCCESSFUL APPLE ANALYST THESE DAY IF YOU DON'T HAVE ACCESS TO THIS INFORMATION. SO HE ASKED ME ABOUT IT. AND I SAID, WELL, I DID YEARS AGO, BUT I DON'T BOTHER ANYMORE BECAUSE EVERYBODY'S GOT-- MY SEVENTH GRADE DAUGHTER AND HER FRIENDS ALL HAVE THIS INFORMATION. I DON'T WANT TO BE THE 50th GUY CALLING UP A CLIENT SAYING --
FABER: WHAT'S YOUR SENSE IN TERMS OF WHAT THEY'RE LOOKING FOR? IN OTHER WORDS, IF THE JUSTICE DEPARTMENT, S.E.C. CONTINUE TO MOVE AHEAD WITH THIS BASED ON AT LEAST WHAT YOU KNOW FROM YOUR CONVERSATION, ARE THEY GOING TO SAY NOBODY CAN DO CHANNEL CHECKS ANY LONGER?
KINNUCAN: THAT WOULD BE ONE IMPLICATION, I GUESS. IT WOULD BE A FAIR CONCLUSION. BUT IT'S INTERESTING TO ME THAT THIS STUFF HAS BEEN GOING ON FOR YEARS NOW AND YOU CAN SEE IT EVERY DAY IN OTHER CASES, WAFER STARTS, A NUMBER OF FIRMS PUBLISH ON A REGULAR BASIS WAFER STARTS FROM TSMC. FOR INSTANCE, JUST LAST WEEK, BROADCOM TOOK THEIR NUMBER UP 25%. OMNIVISION WENT UP 45%. THESE ARE BEING PUBLISHED BY THE BIG BANKS ON A DAILY BASIS. AND IT HAS BEEN FOR YEARS. ANOTHER THING IS SOME ANALYSTS BACK IN EARLY AUGUST MADE A BIG CALL DOWNGRADING INTEL BECAUSE THEY HAD JUST GOT THE MOTHERBOARD PRODUCTION DATA OUT OF TAIWAN FROM CAMPAL AND FOXCONN THAT THEY HAD SEEN DRASTIC MOTHERBOARD PRODUCTION CUTS SO THEREFORE THEY WERE DOWNGRADING INTEL. THAT WAS THE DAY OF THE CISCO CALL. TOOK INTEL DOWN 10% AND BROADCOM DOWN 10%, THE ENTIRE TECH TAPE. AND THEN AFTER THAT, WE HAD CISCO. AND IT MADE FOR A PRETTY UGLY MONTH OF AUGUST.
KAMINSKY: JOHN LET'S GO BACK TO YOUR CLIENTS FOR A QUICK SECOND SO WE'RE CLEAR ON THIS. YOU WORK WITH BOTH MUTUAL FUNDS AND HEDGE FUNDS. BUT IT WAS YOUR UNDERSTANDING THAT VISIT THAT YOU HAD THAT THIS WAS AN INVESTIGATION A FOCUS ON HEDGE FUNDS ONLY, CORRECT?
KINNUCAN: NO, THAT WOULD BE OVERSTATING. THAT WOULD BE SPECULATION. ALL THEY DISCLOSE IS THEY WERE INVESTIGATING A LARGE INSIDER TRADING RING.
KAMINSKY: SO IT IS POSSIBLE THAT SOME OF THE MUTUAL FUNDS THAT ARE ALSO ACQUIRING THIS TYPE OF CHANNEL CHECK INFORMATION MAY IN FACT BE INVOLVED AT SOME POINT?
KINNUCAN: I THINK THAT'S A FAIR STATEMENT.
FABER: YOU KNOW, JOHN, EXPERT NETWORKS SEEM TO ALSO BE A PART OF THIS PROBE, BASED ON MY OWN REPORTING AS WELL. YOU'RE NOT OBVIOUSLY THAT. YOU'RE A RESEARCH BOUTIQUE, GOING OUT THERE, TRY TO FIND DIFFERENT DATA POINTS, TALKING TO YOUR OWN INDUSTRY CONTACTS AND OBVIOUSLY PROVIDING YOUR ANALYSIS TO YOUR CLIENTS, CORRECT? IT'S NOT THE SAME AS THESE EXPERT NETWORKS WHERE THEY'RE HOOKING YOU UP WITH SOMEBODY IF YOU'RE AT A HEDGE FUND PERHAPS WITH SOMEONE WHO WORKS AT ONE OF THOSE COMPANIES WHO CAN PROVIDE THAT PERSPECTIVE?
KINNUCAN: YES, THAT'S TRUE. HOWEVER, TO ME, THINKING ABOUT THIS, THE WHOLE CONCEPT OF EXPERT NETWORKS IS A BIT OF A SMOKE SCREEN HERE BECAUSE IF YOU THINK ABOUT IT, IT'S IMPOSSIBLE TO BE AN ANALYST ON WALL STREET UNLESS YOU HAVE AN EXPERT NETWORK. I KNOW THAT MY CONTACTS AT THESE PRIVATE COMPANIES, FOR INSTANCE, ARE HAVING LUNCH ON A REGULAR BASIS WITH ANALYSTS FROM JEFFRIES AND MORGAN STANLEY AND GOLDMAN SACHS AND WHATNOT. AND THEY SEND ME -- I GET FORWARDED THE RESEARCH REPORTS FROM THESE BANKS -- MAJOR BANKS. AND FRANKLY, IT'S A LITTLE BIT INTIMIDATING. I SAY, GEEZ, TO MYSELF, I THOUGHT I HAD PRETTY GOOD CONTACTS. BUT I'M GOING TO HAVE TO REALLY GET UP EARLIER IN THE MORNING.
KAMINSKY: LISTEN, 3:00 AM IS AN EARLY TIME TO GET UP. I GET UP AT 4:30 A.M. 3:00 IS EARLY. JOHN, ONE LAST QUESTION HERE. IN TERMS OF YOUR COMPENSATION AND YOUR RELATIONSHIP WITH YOUR CLIENTS, I THINK YOU MENTIONED IT'S A SUBSCRIPTION, IT'S A CONTRACT-BASED SERVICE. YOU'RE BASICALLY ON RETAINER, IS THAT HOW IT WORKS, FOR A PERIOD OF TIME?
KINNUCAN: IT'S A QUARTERLY RETAINER, RENEWABLE AT THE CLIENT'S LEISURE.
FABER: A LOT OF PEOPLE SAY, DON'T MESS WITH THE FEDS. WHEN THEY COME INTO YOUR YARD AND ASK FOR YOUR COOPERATION, YOU'RE PROBABLY BETTER OFF GIVING IT. MOST PEOPLE WOULD SAY, YOU CERTAINLY DON'T WANT TO GO ON TELEVISION BUT YOU'VE CHOSEN TO DO THAT. I'M CURIOUS AS TO WHY.
KINNUCAN: WELL, I THOUGHT ABOUT IT LATER THAT EVENING AFTER THEY HAD ARRIVED, AND I FEEL VERY STRONGLY I HAVE DONE NOTHING WRONG, MY CLIENTS HAVE DONE NOTHING WRONG. AND I JUST FELT IT WAS THE RIGHT THING TO DO. I'VE BEEN DRAGGED ALONG THE PAVEMENT A FEW HUNDRED FEET UNDERNEATH THE BUS AND LOST A LOAN AT 40 BELOW ON THE BROOKS RANGE. TO ME, IT'S ANOTHER CHAPTER AND I'M TRYING TO DO THE RIGHT THING.
FABER: WE WISH YOU LUCK WITH THAT AND APPRECIATE YOUR JOINING US, JOHN. THANK YOU VERY MUCH.
KINNUCAN: THANK YOU.
FABER: JOHN KINNUCAN, FOUNDER OF BROADBAND RESEARCH.
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