Galleon Group founder Raj Rajaratnam and five others have been
arrested and charged in a $20 million insider-trading case,
prosecutors said.
At a press conference Friday, U.S. Attorney Preet Bharara
announced that Rajaratnam, founder of Galleon Group and portfolio
manager for Galleon Technology Funds, has been charged with four
counts of conspiracy and eight counts of securities fraud.
Galleon at one point had as much as $7 billion in assets under
management. The company now has about $3.7 billion in assets under
management.
"This is not a garden-variety insider-trading case," Bharara
said. "This case represents the largest hedge-fund insider-trading
case ever charged criminally."
Bharara also said he believed it was the first time that
prosecutors had used a wiretap in an insider-trading case.
Rajaratnam, 52 years old, was taken into custody at his home in
New York by agents of the Federal Bureau of Investigation shortly
after 6 a.m. EDT on Friday.
At a bail hearing Friday, Jim Walden, a lawyer for Rajaratnam,
said he believed the government's theory in the case was novel,
noting prosecutors had argued in part that Rajaratnam encouraged an
alleged co-conspirator to leave an email trial in order to help
conceal the scheme.
"Isn't it usually the other way around?," Walden asked.
He also said that prosecutors and investigators appeared to have
misconstrued terms Rajaratnam used in his business, such as "radio
silence."
"They don't understand the business Mr. Rajaratnam was
legitimately employed in," Walden said.
In court documents, prosecutors said Rajaratnam had expressed to
another individual that he believed a former Galleon Group employee
was wearing a wire and that Rajaratnam had purchased a plane ticket
to fly to London on Friday from New York's John F. Kennedy
International Airport. He had booked a return flight from Geneva on
Oct. 22, prosecutors said.
A federal magistrate judge indicated late Friday that he was
inclined to set bail at $100 million for Rajaratnam. His travel is
restricted to 110 miles from New York City. Prosecutors had sought
his detention.
Assistant U.S. Attorney Joshua Klein said he believes Rajaratnam
has an incentive to flee in part because he faces 97 months to 121
months in prison on the charges under federal sentencing
guidelines.
Klein said Rajaratnam engaged in a "veritable smorgasbord of
insider trading tactics," including engaging in a pattern of
trading designed to "mask" his alleged improper activity.
Others charged criminally in the case include Rajiv Goel, an
Intel Corp. (INTC) employee involved in Intel's investments; Anil
Kumar, a director at global management-consulting firm McKinsey
& Co.; Danielle Chiesi and Mark Kurland of New Castle Partners
LLC, the one-time equity hedge-fund group at Bear Stearns Asset
Management Inc.; and Robert Moffat, a senior vice president at
International Business Machines Corp. (IBM).
"Anil Kumar is as shocked as everyone else who know him to see
his name in this complaint," said Charles E. Clayman, a lawyer for
Kumar. "He is a man of integrity and honesty. He emphatically
denies these charges."
Kerry A. Lawrence, Moffat's lawyer, said his client was
"shocked" by the criminal charges. "We look forward to a favorable
resolution of the case," he said.
Lawyers for Chiesi and Kurland didn't immediately return phone
calls seeking comment. A lawyer for Goel couldn't immediately be
located.
Bharara, the U.S. Attorney, said the investigation is
ongoing.
The Securities and Exchange Commission separately brought civil
insider-trading charges against Rajaratnam and his company. The SEC
also brought charges against the five other individuals who had
been charged criminally and against New Castle. The regulator, in
its civil case, claims the scheme netted more than $25 million in
illicit gains.
In a statement, Galleon Group said: "Galleon was shocked to
learn today that Raj Rajaratnam was arrested this morning at his
apartment. 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 allegations put Rajaratnam at the center of several insider
trades in which he allegedly caused Galleon funds to act on inside
information or passed along tips to others.
Robert Khuzami, the SEC's director of enforcement, said of
Rajaratnam: "He is not a master of the universe; he's a master of
the Rolodex."
In one instance, prosecutors allege that Rajaratnam, between
January 2006 and July 2007, received nonpublic information about
Polycom Inc. (PLCM), Hilton Hotels Corp. and Google Inc. (GOOG) and
caused Galleon Technology Funds to make improper trades on that
information. As a result, the Galleon funds earned more than $12.7
million, prosecutors said.
Google and Polycom declined to comment.
The sources included an insider at Polycom, a source at Moody's
Corp. (MCO) who provided information pertaining to Hilton and a
source at Market Street Partners who provided information
pertaining to Google, prosecutors said.
"Moody's has strict policies against divulging confidential
information, and the alleged wrongdoing by an individual at Moody's
would be an egregious violation of Moody's policies and values," a
Moody's spokesman said in a statement. "Moody's fully supports the
government's prosecution of insider trading and will provide every
assistance in its investigation of this matter."
The information was passed to Rajaratnam by an unnamed
cooperating witness who has provided details of some of the alleged
insider trading to prosecutors, according to court documents.
The cooperating witness, referred to as Tipper A in the SEC
complaint, has known Rajaratnam since 1996 when Rajaratnam worked
at a broker-dealer organization and the witness worked at a
publicly traded company, according to the SEC.
The cooperating witness worked a brief time at Galleon in the
late 1990s and later approached Rajaratnam about working again at
Galleon after he faced financial difficulties in late 2005, the SEC
said.
"In response, Rajaratnam asked whether Tipper A had inside
information about any public companies," the SEC said in its
complaint. The cooperating witness then agreed to provide
Rajaratnam with information about Polycom in the hopes of securing
a position at Galleon and "in anticipation of receiving future
inside tips from Rajaratnam in exchange," the SEC said.
Walden, Rajaratnam's lawyer, said the cooperating witness has
apparently agreed to plead guilty.
In another instance, Chiesi, the New Castle employee, allegedly
received inside information regarding Akamai Technologies Inc.
(AKAM) and Advanced Micro Devices Inc. (AMD) from an unnamed Akamai
executive and Moffat, the IBM executive, prosecutors said.
She allegedly passed the information to Rajaratnam, who
allegedly provided her with information regarding AMD and other
publicly traded companies, the government said.
As a result of information Chiesi allegedly received from
Rajaratnam, Moffat and others, New Castle earned a profit of more
than $2.4 million, prosecutors said.
As an example, Chiesi allegedly called Rajaratnam on his
cellphone in a wiretapped telephone call on July 24, 2008, to tell
him that Akamai was planning to "guide down" expectations for its
earnings the following Wednesday and that, internally, the company
expected its stock price was going to go down to $25 a share,
prosecutors said.
Rajaratnam allegedly said he would be "radio silent" about the
information and told Chiesi that she had "a few more days" before
Akamai's report, prosecutors said. She allegedly replied "Just keep
shorting every day. We got a lot of days..."
After Akamai announced that its expected earnings for the
following quarter would be lower than analyst expectations,
Rajaratnam allegedly called Chiesi to thank her for the information
she provided, according to prosecutors.
A McKinsey spokeswoman said, "The firm was distressed to learn
that Mr. Kumar has been arrested and is looking into the matter
urgently."
Chuck Mulloy, an Intel spokesman, said, "We can confirm that Mr.
Goel is an employee of Intel's treasury department, not Intel
Capital. He's been placed on administrative leave as we look into
this matter. Intel was not aware of the case and was not and has
not been contacted by authorities."
-By Chad Bray, Dow Jones Newswires; 212-227-2017;
chad.bray@dowjones.com
(Jenny Strasburg and Don Clark of The Wall Street Journal
contributed to this article.)