Raj Rajaratnam & the Galleon Group
Raj Rajaratnam’s, the billionaire founder of Galleon Group, was the story that dreams are made of. Rajaratnam, 52, a graduate of the University of Pennsylvania’s Wharton School, was identified this year by Forbes as the 559th richest person in the world, with a net worth of $1.3 billion. Galleon Partners is based in Manhattan and has offices in London, Singapore, Mumbai, and Menlo Park, California.
Galleon, which started as a hedge fund firm focusing on technology and health-care stocks, grew to more than $5 billion in 2001 from its start in January 1997. Rajaratnam founded Galleon with three other colleagues from Needham & Co., an investment bank that focused on technology and health-care companies.
Galleon Management, the company’s advisory business, oversaw more than $2.6 billion at the end of March, mostly on behalf of hedge funds, according to regulatory filings it submitted to the SEC at the time. Rajaratnam holds a 50 percent to 75 percent controlling stake in the advisory. Galleon had as much as $7 billion under management.
The Scam
Raj Rajaratnam and and former directors at a Bear Stearns Cos. hedge fund were among six people charged in a $20 million insider trading scheme by the U.S. Securities and Exchange Commission. The SEC’s complaint said that Rajaratnam didn’t deserve his reputation for “genius trading strategies” or “astute study of company fundamentals or marketplace trends” but that it was a simple case of Raj Rajaratnam cultivating a network of high-ranking corporate executives and insiders, and then tapping into this ring to obtain confidential details about quarterly earnings and takeover activity.
Apparently, Rajaratnam conspired with Intel Capital treasury department managing director Rajiv Goel and Anil Kumar, a director of McKinsey & Co and indulged in insider – trading transactions over three years starting in January 2006.
The Scheme targeted top company stocks including Hilton Hotels Corp, Google Inc, IBM, Advanced Micro Devices Inc and several others. The scheme made more than $20 million in illegal profits over several years. It is alleged that tips to Rajaratnam came from insiders and others at hedge funds, investor relations firms, and companies including Intel, IBM, McKinsey, and companies whose shares were traded in the scheme.
In a second criminal complaint three other people — New Castle portfolio manager Danielle Chiesi, New Castle general partner Mark Kurland and Robert Moffat, a senior vice president in the IBM technology group – were accused of insider trading crimes and earning millions of dollars in illegal profits.
All six were charged with securities fraud and conspiracy in two criminal complaints filed in U.S. District Court in Manhattan. On Friday evening, a U.S. magistrate judge in New York said Rajaratnam may be released on a $100 million personal recognizance bond secured by $20 million in cash and property. Kumar was permitted to be released on a $5 million bond, Kurland on a $3 million bond, and Moffat and Chiesi on a $2 million bond. In California, Goel posted $300,000 cash for bail.
The six were also charged in a separate civil complaint by the U.S. Securities and Exchange Commission (SEC). The SEC said the accused traded on insider information from 10 companies.
Rajaratnam traded in 2006 and 2007 on leaks from insiders at Polycom, Moody’s Investors Services Inc. and Market Street Partners. A Moody’s analyst offered news about Hilton, and the Market Street Partners source provided tips about Google, prosecutors said. Rajaratnam earned $12.7 million on the leaks and gave a confidential government informant inside information on other companies in return, they said.
Goel, who had been working in the treasury of Intel, the world’s biggest chipmaker, passed along news about Clearwire Corp. that he learned from investments made by Intel, and Rajaratnam earned about $579,000 in profits, prosecutors said. In return, Rajaratnam is alleged to have placed profitable trades for the benefit of Goel in a personal brokerage account maintained by Goel at Charles Schwab.
In another alleged scheme, Chiesi got secret tips from an unidentified person at Akamai Technologies Inc. and from Moffat, who passed along information about IBM, Sun Microsystems Inc., and Advanced Micro Devices, one of the complaints says. Chiesi passed along the tips to Kurland and the two traded on the news, the complaint says.
These tips generated others, prosecutors said, as Chiesi passed them onto to Rajaratnam, who in turn gave Chiesi inside information about AMD and other companies, prosecutors said.
The complaint quotes from conversations between Chiesi and Rajaratnam, including a July 24, 2008, discussion that they had after she spoke to the Akamai executive. That day, Akamai stock had closed at $32.18.
Investigators said they used court-approved telephone wire taps for the first time in a Wall Street insider trading case. They also claimed that this was not the garden-variety insider trading case. They emphasized that they were targeting white-collar insider trading rings with the same powerful investigative techniques that have worked so successfully against the mob and drug cartels. The prosecutors also warned rest of Wall Street that they would go after privileged Wall Street insiders who were considering breaking the law.
Securities fraud charges carry possible maximum prison sentences of up to 20 years.
The action of the SEC has sent shivers through the hedge fund industry which has traditionally picked up and shared trading tips to make big profits. There are about 8,000 hedge funds in operation and there will always be a few rogues behaving badly.
LTTE Supporter
Rajaratnam, born into a family of well-to-do Tamils in the Sri Lankan capital of Colombo, is one of the largest investors on the Colombo Stock Exchange. He is a well known supporter of the Lankan Tamil Tigers Ealam (“LTTE”). In September 2009 he donated $1 million for the rehabilitation of former soldiers of the LTTE. The LTTE fought 25 years to create a separate state for Sri Lanka’s minority Tamils but were routed by the Sri Lankan Army in May 2009 in a bloody battle.
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