As head of a $7 billion hedge fund, Raj Rajaratnam’s phone often rang off the hook, and many of the calls were from corporate insiders who provided a gold mine of market-moving information.

Unbeknownst to Rajaratnam, though, federal agents tapped his phone and the Wall Street titan was ultimately found guilty of perpetuating one of the largest cases of insider trading in history.

Born in Sri Lanka, Rajaratnam grew up to become a self-made millionaire. He founded Galleon Group, which became one of the world’s largest and most powerful hedge funds. Galleon Group generated stellar returns for investors, but Rajaratnam’s success wasn’t built on his trading expertise alone. Rajaratnam tapped a vast network of Wall Street insiders to funnel him inside information. 

Read on to go inside this Wall Street scandal!

By Drew SandholmPublished 7 March 2012

Danielle Chiesi was a former beauty queen turned hedge fund trader. Chiesi became one of Rajaratnam’s best sources, sending him tips that led to big profits on inside deals. Her top-secret information helped Rajaratnam make millions.

“I just got a call from my guy,” Chiesi said in a recorded phone conversation. “I played him like a finely tuned piano.”

Chiesi had the inside scoop on Akamai. She told Rajaratnam the technology company would miss earnings, information that wouldn’t become public for six days. In turn, Rajaratnam shorted the stock, allowing him to profit should Akamai’s share price fall.

When Akamai finally did announce an earnings miss, its stock tumbled 25 percent and Rajaratnam made more than $5 million.

Rajaratnam continued to press his sources for exclusive information and his stock calls were strikingly accurate. Research he published on Intel, for example, was so precise that company executives became concerned he was getting inside information. The technology company decided to take action and set up hidden cameras around its office. 

Intel soon captured video of product marketing engineer Roomy Kahn faxing confidential information to Rajaratnam. Kahn was sending detailed numbers about chip orders that Rajaratnam could use to accurately estimate the company’s earnings.

Intel executives reported Kahn to the authorities, who launched an investigation. Kahn later pled guilty and served six months of house arrest. Investigators couldn’t prove Rajaratnam traded on the inside information, however.

Years later, Rajaratnam convinced an old friend, Anil Kumar, to be his personal consultant. Kumar worked at the prestigious firm McKinsey & Co. and soon he began to funnel secrets about McKinsey’s corporate clients to Rajaratnam.

In return for his expertise, Rajaratnam paid Kumar $500,000 a year. Rajaratnam used offshore accounts and shell companies to conceal the payments to Kumar.

In 2006, Kumar was consulting for Advanced Micro Devices, a microprocessor maker. By attending the company’s strategy meetings, he learned it made a secret bid to acquire graphics chipmaker ATI.

Armed with this information, Rajaratnam was able to buy shares of ATI ahead of the acquisition. When the deal became public, ATI’s stock soared by 25 percent and Rajaratnam cleared $23 million.

By 2007, Rajaratnam had built Galleon Group into one of the world’s largest most powerful hedge funds. Agents at the U.S. Securities and Exchange Commission received a tip that Galleon Group could be engaged in insider trading, so they launched an investigation.

In February 2007, the SEC subpoenaed Galleon’s electronic records. Federal agents combed through more than 10,000 documents, including instant messages (IMs). Rajaratnam knew the SEC would monitor IMs, so he had always instructed his sources to only talk on the phone. However, investigators found a series of suspicious IMs from someone with the screen name “Roomy81.”

“Do not buy Polycom till I get guidance,” read the instant message from “Roomy81” to Rajaratnam.

Rajaratnam was subpoenaed and brought in for several hours of questioning. He told agents that “Roomy81” is Roomy Kahn — the woman who pled guilty to insider trading a decade earlier.

Several months later, FBI agents approached Kahn at her home in Atherton, Calif. She invited the agents in but denied involvement in insider trading until they showed her the IMs she sent to Rajaratnam. Afterward, Kahn agreed to become an FBI informant.

Kahn called Rajaratnam and tried to bait him, as FBI agents recorded conversation after conversation. In January 2008, Rajaratnam made a few incriminating statements, which allowed agents to ask a judge for permission to tap his phone.

Wiretapping is an aggressive tactic that has been rarely used in cases of white-collar crime. When the tap on Rajaratnam’s cellphone went live in March 2008, authorities were able to peer into his world as never before.

“We were observing the criminal activity as it was happening,” said Josh Klein, an assistant U.S. Attorney assigned to the Rajaratnam case. “We had a window into these schemes as they were being hatched.”

Federal agents picked up a series of calls with Chiesi. In July 2008, she phoned Rajaratnam to say she has secret information on Internet services company Akamai.

“They’re gonna guide down,” Chiesi was recorded as saying. “I just got a call from my guy.”

Chiesi was saying that the company was going to report earnings that would disappoint traders and as a result its stock would likely take a hit. When the market opened, Rajaratnam shorted the stock.

Just as Chiesi said, Akamai delivered lower guidance when it reported earnings five days later. In turn, its stock fell by $7 a share, and Rajaratnam made more than $5 million.

By 2008, the U.S. economy was reeling from the worst financial crisis since the Great Depression. Galleon Group was not immune to the downturn, as nervous investors started pulling their money out of the market. Rajaratnam was feeling the pressure but managed to reel in his biggest source yet.

Rajat Gupta was an investor at Galleon who was well connected on Wall Street. He was the former head of McKinsey & Co. and served on the board of both Procter & Gamble and Goldman Sachs Group. In July 2008, Rajaratnam took a call from Gupta.

“There’s a rumor that Goldman might look to buy a commercial bank. Have you heard anything along that line?” Rajaratnam was recorded as saying.

“Yeah,” Gupta replied on tape. “This was a big discussion at the board meeting.”

Six weeks later, Lehman Brothers went bankrupt and the big banks were struggling. Goldman Sachs was in secret negotiations with investor Warren Buffett, who would later invest $5 billion in the financial institution. On Sept. 23, 2008, Gupta and other board members met to approve the deal. Shortly after the meeting, Rajaratnam bought a substantial number of Goldman shares.

Meanwhile, McKinsey & Co. consultant Anil Kumar had been funneling information to Rajaratnam for two years. In August 2008, he provided Rajaratnam with some major news about Advanced Micro Devices: The technology company had agreed to a multibillion-dollar cash infusion.

“They’ve shaken hands and said they’re going ahead with the deal,” Kumar was recorded telling Rajaratnam. “So I think you can now just buy.”

“Wait, how much are they investing?” Rajaratnam asked on tape.

“They’ll probably say they put up $6 (billion) to $8 billion,” Kumar answered.

This was just one of the more than 2,400 phone conversations federal agents had recorded.

After a two-and-a-half-year investigation, federal agents arrested Rajaratnam at his home on Oct. 16, 2009. Rajaratnam was charged with 14 counts of conspiracy and securities fraud. He was released on a $100 million bond and awaited trial.

Meanwhile, Kumar became a cooperating witness and agreed to testify against Rajaratnam. Chiesi refused to cooperate, though. She later pled guilty and was sentenced to 2.5 years in prison.

As Rajaratnam’s trial got underway, Kumar testified against him. Kumar told the court  Rajaratnam paid him more than $2 million for information. The defense argued it wasn’t inside information but diligent research that drove Rajaratnam’s decisions.

After deliberating for 12 days, the jury found Rajaratnam guilty on all counts. He was later sentenced to 11 years in prison. The judge also fined him $10 million and ordered him to forfeit $53.8 million.

Gupta’s criminal trial is scheduled to start on May 21 in U.S. District Court in New York. He denies the charges against him.

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