Published: Thursday, 22 Oct 2009 | 10:25 AM ET

Text Size

This article was reported by Michael J. de la Merced, Zachery Kouwe and Alex Berenson and written by Mr. Berenson.

Roomy Khan, the central witness who brought down the Galleon hedge fund, is a former Galleon employee with a history of financial trouble who agreed to cooperate with prosecutors after she was caught making trades using inside information.

Ms. Khan, previously identified only as “Tipper A” or a cooperating witness, provided much of the evidence that prosecutors are using to bring insider trading charges against the billionaire Raj Rajaratnam, who is shutting down his Galleon fund in the wake of the charges.

She taped conversations with him and told prosecutors that she had provided inside information about Google and other stocks. She has agreed to plead guilty to conspiracy and securities fraud and is working with law enforcement in hopes of receiving a lighter sentence, according to the criminal complaint.

Ms. Khan, who was identified by people close to the case, has a legal past that may present a hurdle for federal prosecutors. In a lawsuit settled last month, a housekeeper for Ms. Khan and her husband, Sakhawat, said they had violated minimum wage laws by paying her about $250 a week for 80 to 90 hours of work. The lawsuit was settled after a judge said the Khans had fabricated evidence.

Mr. and Ms. Khan were also sued in 2005 in New York by Deutsche Bank for failing to repay a large promissory note, though all the details are not listed in the court documents.

• Follow Major Stock Indicies Here

In a letter released Wednesday, Mr. Rajaratnam wrote that he was innocent and would fight the charges. He added that he expected to return the $2.5 billion he now manages for outside investors by the end of the year. But he said he hoped to sell Galleon as a single unit so that his employees would not have to find new jobs individually.

Because most of Galleon’s holdings are in heavily traded companies, unwinding the fund should cause no disruption to stock markets, a person close to Galleon said.

Little public information about Ms. Khan is available. On a 2004 federal campaign donation form, she listed her occupation as stock trader. Until earlier this year, she and her husband lived in a 9,000-square-foot mansion with an assessed value of $13 million in Atherton, Calif., a Silicon Valley suburb of expansive estates. They moved out several months ago, according to neighbors, and the house was sold. Mr. Khan did not return phone calls or a respond to an e-mail message, and Ms. Khan did not respond to e-mail messages. A lawyer who represented them in the civil lawsuit filed by the housekeeper said he could not comment.

A spokesman for the United States attorney’s office in Manhattan would not comment on Ms. Khan’s involvement.

In the criminal complaint against Mr. Rajaratnam and two other defendants, Ms. Khan is listed as “CW,” or “cooperating witness.” In a related Securities and Exchange Commission complaint, she is listed as Tipper A. According to the S.E.C. complaint, she worked for Galleon in the late 1990s. In late 2005, she approached Mr. Rajaratnam, saying she had financial difficulties and wanted to return to Galleon.

He did not rehire her, but over the next two years she provided him with tips about Google, Hilton Hotels, and Polycom, which he used to make $13 million in profits, according to the criminal complaint. The complaint does not say that she received any payment or anything of value in return for the tips. She made about $1.5 million on improper trades in the same stocks in 2006 and 2007, according to a civil complaint filed by the S.E.C.

In November 2007, Ms. Khan began to cooperate with the F.B.I., according to the complaint. She taped four phone calls with Mr. Rajaratnam and provided evidence against him. She agreed to plead guilty to conspiracy and securities fraud and cooperated “in the hope of receiving a reduced sentence,” the complaint said.

But as the investigation progressed, Ms. Khan and her husband faced another legal problem, a civil lawsuit filed by Vilma Serralta, who worked as their housekeeper in Atherton from 2002 to 2006. Ms. Serralta claimed she had been paid about $250 a week for 80 to 90 hours of work, violating labor laws.

Ms. Khan and her husband denied the allegations and in March 2009 produced a work schedule they claimed had been signed by Ms. Serralta in 2002, when she started to work for them.

But lawyers for Ms. Serralta said the document had been fabricated and Ms. Serralta’s signature forged. On Aug. 28, District Judge Claudia Wilken said she would “give the jury a strongly worded instruction about the fabrication of evidence.”

Less than a month later, just before the case was set for trial, Mr. and Ms. Khan settled the case with Ms. Serralta. Christopher Ho, senior staff attorney at Legal Aid Society-Employment Law Center, which represented Ms. Serralta, said he could not disclose the specific terms of the settlement but that they were favorable to Ms. Serralta.

• A Gallery of Financial Crime

The Khans and their business, Digital Age Capital Ltd., received a summons from Deutsche Bank Securities in 2005 in connection with what appeared to have been a default in an earlier settlement. Though the details are not in the public court filings, the Khans were supposed to pay $788,850. According to a court filing in June 2006, they agreed to pay a total of $803,850, including interest and lawyer fees, to settle the matter.

Print

Email

Text Size