The linking of Advanced Micro Device's former top executive to the largest U.S. insider trading scheme in decades may raise questions about its business practices -- and that of the chipmaking venture, Globalfoundries, that it spun off.

AMD and Globalfoundries -- launched in 2008 and considered an unlikely contender to heavyweight rivals TSMC and UMC of Taiwan -- can ill afford a major legal and corporate distraction as the contract chipmaker tries to secure a foothold in a fiercely competitive sector.

Shares in AMD, which owns a large but minority stake in the venture with Abu Dhabi investors, slid 1.9 percent in slow after-hours trade after the Wall Street Journal reported Hector Ruiz had passed on confidential information regarding the spinoff to a hedge fund manager when he was AMD's CEO.

Ruiz is now chairman of Globalfoundries.

The 63-year-old Mexico-born tech veteran -- sometimes called Uncle Hector in Internet chatrooms but criticized for allowing AMD to hemorrhage market share to Intel -- became the biggest name to be linked to the widening scandal orbiting Galleon, which has traumatized Wall Street.

Citing a person familiar with the matter, the newspaper reported Ruiz was the unnamed AMD executive accused in a criminal case, filed by the Manhattan U.S. attorney's office, of sharing information regarding the complex manufacturing operation's spinoff to a portfolio manager.

Ruiz had no comment when contacted through a spokesman.

AMD says it is unaware of any allegations of criminal misconduct regarding its current or former employees, while Globalfoundries said it had not been contacted by any government agency in relation to the case.

Oh my, said JMP Securities analyst Alex Gauna. Well, I guess the good news is that he has been in a diminished role from what he was. But the bad news is, that it's not a zero role.

It's going to add distractions to a company that's got quite a lot on its plate, trying to execute a very complex model with new partners, new structure, very strange financials, and now this sort of over-hang.

Management's time is going to be taken up with attorneys.

Personal connections -- and information sharing -- matter in the verdant and concrete expanses of Silicon Valley, where informal networks form the bedrock of business and word-of-mouth travels at cyberspatial speeds.

FROM THE TOP

Others argue that the cozy network of entrepreneurs, company executives, venture capitalists and public relations firms can sometimes get too cozy.

Given the alleged information leak is reported to have come from the top, government prosecutors would try to discover the scope of leaks at AMD and could bring action against the company, said Michael Perlis, a former assistant director of enforcement for the Securities Exchange Commission.

If AMD had sufficient policies and procedures in place and took remedial steps in regard to their officer, I think it unlikely the SEC would take action, said Perlis, a white-collar defense attorney at Stroock & Stroock & Lavan in Los Angeles.

If the SEC finds that this was not an isolated incident, then it's possible.

Globalfoundries was spun off from AMD in March with ambitions of taking on long established players, including TSMC. With AMD as its first customer, and STMicroelectronics a second, Globalfoundries' Chief Executive Doug Grose has said the company is looking for more partners, including Britain's ARM, which designs smaller chips used in devices such as mobile phones and cameras.

Contract chip makers, or foundries, rely in part on their ability to protect their chip-design clients' technology and intellectual property to win business. If the case against Ruiz is confirmed, investors may worry that the year-old venture might hit a stumbling block even before it gets off the ground.

While analysts agree Ruiz's link to insider trading is at the very least a public relations black eye for the company, they say AMD or Globalfoundries is unlikely to incur any direct, near-term loss of business, based on current reports.

It'll definitely be a negative for PR for the company: 'see how your ex-CEO was an informant on insider trading', Wedbush Morgan's Patrick Wang said. But it's water under the bridge at this point. The management team in place is not involved

I don't think you'll see ST Micro walk away from Globalfoundries because they had a leaky faucet before.

One thing's for sure: Silicon Valley's rumor mill is in overdrive.

I'm as shocked as everyone else here, Wang said.

Since the story hit the tape, I've been on the phone with friends, colleagues and clients talking about 'wow'.

(Writing by Edwin Chan, Editing by Ian Geoghegan)

Electronics Intel Insider trading