Saturday, October 17, 2009

Galleon’s Rajaratnam Charged in Biggest Hedge Scheme

Wall Street Panics In Wake Of Galleon Insider Trading Case
U.S. charges billionaire Rajaratnam with record insider trading
http://www.bloomberg.com/apps/news?pid=20601087&sid=aQFoJVX3k8Ho


Oct. 16 (Bloomberg) -- Raj Rajaratnam, the billionaire founder of Galleon Group, and former directors at a Bear Stearns Cos. hedge fund were among six people charged in a $20 million insider trading scheme that federal prosecutors called the biggest ever involving hedge funds.
Prosecutors also arrested Rajiv Goel, who worked at Intel Capital as a director in strategic investments, Anil Kumar, who worked as a director at McKinsey & Co., and IBM Corp. executive Robert Moffat. The former officials at Bear Stearns Asset Management are Danielle Chiesi and Mark Kurland, who were affiliated with the firm’s New Castle Partners, which managed about $1 billion.
“The defendants operated in a world of, you scratch my back, I’ll scratch your back,” U.S. Attorney Preet Bharara in Manhattan said at a press conference today. “Greed, sometimes, is not good.”
The case is the largest ever over hedge fund insider- trading, Bharara said. It’s the first time wiretaps have been used to target insider trading, signaling the government will now use the same tools against Wall Street that it employs in organized crime and drug cases, he said. Bharara called the case “unprecedented.”
Bail Hearing
At a court hearing today, U.S. Magistrate Judge Douglas Eaton set Rajaratnam’s bail at $100 million, to be secured by $20 million in assets and guaranteed by his wife and four others. Rajaratnam may not travel more than 110 miles from New York City and won’t be subject to electronic monitoring.
Assistant U.S. Attorney Josh Klein asked Eaton to hold Rajaratnam in jail pending his trial. He said the hedge fund manager had “enormous incentive” to flee to his native Sri Lanka or elsewhere. The prosecutor said there’s additional evidence and may be more charges against him and that the case is “overwhelming.”
Rajaratnam told court officials after his arrest that he was worth $200 million, Klein said in court. Klein told the judge he’s a billionaire.
Defense attorney Jim Walden said in court that prosecutors are misconstruing the evidence against Rajaratnam and that the case isn’t as strong as prosecutors allege. He said Rajaratnam is a diabetic and supports his parents and won’t flee, and he warned that Galleon, which he said managed $8 billion, may be forced to close if Rajaratnam were jailed.
‘Simple’ Case
“There’s a lot more to this,” Walden said. “This is a simple insider trading case.”
Other defendants arrested in New York were freed after posting bonds between $2 million and $5 million. Goel was arrested in California.
Alan Kaufman, the attorney for Chiesi, 43, said in an interview that his client was “shocked” at her arrest this morning and will plead innocent. Kurland’s attorney, Lawrence Iason, and Moffett’s lawyer, Kerry Lawrence, also said their clients aren’t guilty.
“Anil Kumar is as shocked as everyone else who knows him to see his name in this complaint,” his lawyer, Charles Clayman, said in a statement. “He emphatically denies these charges.”
According to prosecutors, 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. Bharara said the investigation was continuing and declined to say whether others would be charged.
Plane Ticket
Rajaratnam and his firm earned from $17 million to $18 million from the fraud, Bharara said. In recent days, he may have been aware he was under investigation. According to one of two criminal complaints filed today, he told an acquaintance that he believed a former Galleon employee was wearing a “wire.” Rajaratnam bought a plane ticket on Oct. 14 for travel to London today, the complaint says.
“Galleon was shocked to learn today that Raj Rajaratnam was arrested this morning at his apartment,” the firm said in a statement. “We had no knowledge of the investigation before it was made public and we intend to cooperate fully with the relevant authorities. Galleon continues to operate and is highly liquid.”
The U.S. Securities and Exchange Commission today sued Rajaratnam for engaging in insider trading. 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.”
Master of the Rolodex
“Raj Rajaratnam is not a master of the universe, but rather a master of the Rolodex,” Robert Khuzami, director of enforcement at the SEC, said at the press conference. “He cultivated a network of high-ranking corporate executives and insiders, and then tapped into this ring to obtain confidential details about quarterly earnings and takeover activity.”
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. He faces 13 fraud and conspiracy counts, many of which carry 20-year maximum sentences. Under federal sentencing guidelines, he faces 10 years in prison, Klein said in court.
Rajaratnam lives in New York City, as do Chiesi, 43, and Kurland, 60. Goel is 51, lives in Los Altos, California, and appeared in court today in California. A message left for Goel at his home wasn’t returned. Kumar is 51 and lives in Santa Clara, California. Moffat, 53, lives in Ridgefield, Connecticut.
Arrested
The six defendants are charged with using insider information in two overlapping schemes to trade in shares of companies including Google Inc., Polycom Inc., Hilton Hotels Corp. and Advanced Micro Devices Inc., the complaints say.
Prosecutors said they’ve been investigating the case since at least November 2007, when a person they don’t name in the complaint began meeting with agents of the Federal Bureau of Investigation. The person, who has pleaded guilty and is cooperating with authorities, used inside information to trade securities and had tipped Rajaratnam since 2006, prosecutors said.
The person, who had sought a job at Galleon in 2005, helped prosecutors by “making consensual recordings of four telephone conversations” with Rajaratnam, the complaint says.
Authorities say they have other taped conversations of the billionaire as well. On March 7, 2008, the government got court approval to intercept a cell phone he used, according to the complaints. Prosecutors said they’ve also been listening to two of Chiesi’s landlines since August 2008.
Wiretaps
“There are numerous conversations that are recorded that very clearly depict the fact that this defendant engaged in a veritable smorgasbord of insider trading activities,” Klein said in court. He added that Rajaratnam instructed colleagues to create e-mails designed to hide his source of information and “would make trades intended to mask his illegal activity.”
Prosecutors say 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 placed profitable trades for the benefit of Goel in a personal brokerage account maintained by Goel at Charles Schwab,” Bharara said in a statement.
IBM, Sun
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.
“Akamai,” Chiesi told Rajaratnam, according to the complaint. “They’re gonna guide down. I just got a call from my guy.”
Martha Stewart
After Chiesi said that the company would bring the stock down to $25 a share, Rajaratnam replied that he would be “radio silent” and asked when Akamai would report, the complaint says.
“Just keep shorting every day,” Chiesi responded, the complaint says. “We got a lot of days.”
The complaint also quotes from a conversation on or about August 27, 2008, between Chiesi and a co-conspirator not named as a defendant.
“You just gotta trust me on this,” Chiesi is quoted as saying. “Here’s how scared I am about what I’m gonna tell you on AMD.” Chiesi and the co-conspirator talk a little more and Chiesi says, “I swear to you in front of God, you put me in jail if you talk.” Still later, she’s quoted as saying “I’m dead if this leaks. I really am … and my career is over. I’ll be like Martha f---ing Stewart.”
McKinsey
Kumar gave Rajaratnam tips about a McKinsey’s clients, and Moffat tipped Chiesi about an AMD venture in Abu Dhabi in which IBM participated, the complaints allege.
Yolande Daeninck, a spokeswoman for McKinsey, said the firm is “distressed” by Kumar’s arrest. Chuck Mulloy, an Intel spokesman, said the company is investigating and has put Goel on leave. Moody’s said in a statement that it is cooperating with prosecutors. A call to the main number of Market Street Partners, a San Francisco investor relations firm, wasn’t returned. IBM spokesmen Ian Colley and Ed Barbini didn’t immediately respond to messages.
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 held a 50 percent to 75 percent controlling stake in the advisory, the documents show.
The cases are U.S. v. Rajaratnam, 09-02306, and U.S. v. Chiesi, 09-mag-2307, U.S. District Court, Southern District of New York (Manhattan).
FBI On Rajaratnam's Tail Since 2007 http://www.businessinsider.com/details-from-the-raj-rajaratnam-indictment-2009-10
The scandal in photos http://www.businessinsider.com/photos-from-galleon-group-founders-perp-walk-2009-10#raj-looks-embarrassed-1


Profile: Raj Rajaratnam 


In 1997, when the Sri-Lankan born Raj Rajaratnam launched his hedge fund Galleon Technologies, he told a journalist his favourite quote - one borrowed from Intel’s totemic President Andy Grove: “only the paranoid survive.”


Galleon – and Mr Rajaratnam – have to date proved to be consumate survivors.
http://www.ft.com/cms/s/0/ba083d80-ba8a-11de-9dd7-00144feab49a.html
Will Raj Rajaratnam Spend 200 Years In Jail? http://www.businessinsider.com/will-raj-rajaratnam-spend-200-years-in-jail-2009-10




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