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The US attorney has charged six people, including Raj Rajaratnam, founder of the $3 billion New York hedge fund Galleon Group, with securities fraud and insider trading involving more than $20 million in illegal profits, according to US prosecutors and the FBI.
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cnbc.com Raj Rajaratnam being taken into custody |
It is the largest hedge fund insider trading case ever criminally charged, according to Preet Bharara, US Attorney for the Southern District of New York.
The alleged insider trading case occurred among hedge funds Galleon Technology, New Castle and Intel Capital, regarding the stocks of Google, Polycom, Hilton Hotels, Sun Microsystems, Advanced Microsystems and International Business Machines, according to the complaint.
One complaint alleges Rajaratnam conspired with Rajiv Goel of Intel's Treasury and Anil Kumar, a director at McKinsey & Co consulting, from January 2006 to 2008, with the majority of the charges occurring in 2006 and 2007.
On or about Jan. 12 Rajaratnam purchased 60,000 shares of Polycom for Galleon Technology Funds, a complaint said. It said in July 2007 he bought 400,000 shares of Hilton Hotels for Galleon and about 1,000 put options in Google and arranged to short about 25,000 shares of Google stock.
Rajaratnam and Goel conspired from at least March 2008 to October 2008, the complaint said. Rajaratnam purchased 125,800 shares of Clearwire Corp on March 24, 2008.
A co-conspirator made a phone call to Rajaratnam on July 24, 2008 and the next day Rajaratnam sold short about 138,550 shares of Akamai Technologies stock, a complaint alleged. Also as part of the purported scheme, Rajaratnam and Kumar conspired to buy 2.1 million shares of Advanced Micro Devices.
In a statement, Galleon said it was shocked to learn of Rajaratnam's arrest, and that it had no knowledge of the investigation before it was made public. It contines to say that it intends to cooperate fully with the relevant authorities. that it continues to operate and is highly liquid.
A McKinsey spokesperson said the firm was "distressed" to learn that Mr. Kumar had been arrested and is looking into the matter urgently. Intel said in a statement that it was not aware of the case and has not yet been contacted by authorities. If and when it is, the company said it will cooperate fully.
Goel has been put on administrative leave.
It was not immediately known who were the lawyers for the accused.
It appears the FBI had tapped Rajaratnam's cell phone and will use evidence from his phone records to show that he knowingly used insider information to trade in securities. It was the first time court-authorized wiretaps have been used in such a manner.
Bharara said the case should cause financial professionals considering insider trades in the future to wonder whether law enforcement is listening.
"[Rajaratnam] is not a master of the universe. He is a master of the Rolodex," said Robert Khuzami, director of enforcement of the SEC.
The investigation has been ongoing for a long period of time, and the complaint includes the mention of a cooperating witness.
The case appears to go back to something the SEC has been monitoring for a long time — hedge funds hiring employees based on their insider knowledge about companies at which they previously worked to get an edge.
The timing of the arrests might be explained by a footnote in the complaint against Rajaratnam. In it, an FBI agent said he had learned that Rajaratnam had been warned to be careful and that Rajaratnam, in response, had said that a former employee of the Galleon Group was likely to be wearing a "wire."
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cnbc.com Rajaratnam being taken into custody. |
The agent said he learned from federal authorities that Rajaratnam had obtained a plane ticket to fly from Kennedy International Airport to London on Friday and to return to New York from Geneva, Switzerland next Thursday.
Another complaint accused Danielle Chiesi of New Castle — the equity group of Bear Stearns Asset Management; Mark Kurland, senior managing director of Bear Stearns Asset Management; and IBM’s Robert Moffat of securities fraud and conspiracy related to insider trading.
The complaint adds that New Castle ultimately did not profit from the deal because it closed in October during the financial crisis, but Rajaratnam saw a profit of $3.5 million that fall from another deal between AMD and Akamai. That information was allegedly passed on by the defendant from Intel Capital.
Officials cited phone conversations of Chiesi tipping off the Galleon fund manager, while Kurland allegedly gave Chiesi information related to investment banking.
In one conversation about a pending deal that was described in a criminal complaint, Chiesi is quoted as saying: "I'm dead if this leaks. I really am. ... and my career is over. I'll be like Martha (expletive) Stewart."
Stewart, the homemaking maven, was convicted in 2004 of lying to the government about the sale of her shares in a friend's company whose stock plummeted after a negative public announcement. She served five months in prison and five months of home confinement.
According to a criminal complaint in the case, Chiesi and Rajaratnam were heard on a government wiretap of a Sept. 26, 2008 phone conversation discussing whether Chiesi's friend Moffat should move from IBM to a different technology company to aid the scheme.
"Put him in some company where we can trade well," Rajaratnam was quoted in the court papers as saying.
The complaint said Chiesi replied: "I know, I know. I'm thinking that too. Or just keep him at IBM, you know, because this guy is giving me more information. ... I'd like to keep him at IBM right now because that's a very powerful place for him. For us, too."
According to the court papers, Rajaratnam replied: "Only if he becomes CEO." And Chiesi was quoted as replying: "Well, not really. I mean, come on. ... you know, we nailed it."
The criminal complaints in the case also captured what authorities said were efforts by the defendants to hide their conversations from authorities.
In one conversation, Chiesi was heard telling Rajaratnam that she was "glad that we talk on a secure line, I appreciate that," to which Rajaratnam replied: "I never call you on my cell phone," the complaint said. It added that Chiesi said she was "nervous" about being investigated.
Before founding Galleon, Rajaratnam served as chief operating officer of Needham & Company. Forbes estimated his net worth at about $1.3 billion.
Rajaratnam — born in Sri Lanka and a graduate of University of Pennsylvania's Wharton School of Business — has been described as a savvy manager of billions of dollars in technology and health-care hedge funds at Galleon, which he started in 1996. The firm is based in New York City with offices in California, China, Taiwan and India.
Also on CNBC.com:
—CNBC's Bertha Coombs and the wires contributed to this report
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