Billionaire Fund Manager Rajaratnam Arrested

123jump.com Staff
17 Oct, 2009
New York City

Prosecutors charged billionaire hedge fund manager Raj Rajaratnam with insider trading scheme. The prosecutors used for the first time wiretaps in an insider trading case in recent years. The investigation lasted nearly four years and snarled executives at Intel, IBM and McKinsey & Co Inc.

[R]3:30 PM New York – Prosecutors charged billionaire hedge fund manager Raj Rajaratnam with insider trading scheme. The prosecutors used for the first time wiretaps in an insider trading case in recent years. The investigation lasted nearly four years and snarled executives at Intel, IBM and McKinsey & Co Inc.[/R]

Raj Rajaratnam a majority partner in Galleon Management and a portfolio manager of Galleon Group was arrested on Friday and charged with insider trading case that authorities say yielded more than $20 million to its participants. The Galleon founder prosecution is the largest hedge fund case pursued by the authorities with the help of wire tapping.

Rajaratnam was arrested at his home in New York this morning after 6:00 am ET and charged with four counts of conspiracy and nine counts of securities fraud.

Considering Rajaratnam as a flight risk and the gravity of prosecution’s allegations U.S. Magistrate Judge Douglas F. Eaton set a high bail of $100 million secured by $20 million in assets by his wife and four others. Rajaratnam was released after the bail posting.

A different judge had set a bail of $10 million for Bernard Madoff, the New York financier who ran a Ponzi scheme where investors are alleged to have lost as much as $50 billion.

Others arrested in New York were freed after they posted between $2 million and $5 million and Rajaratnam surrendered his passport.

It is illegal to profit from stock trading based on information that is not released to the public. The prosecutors say they have linked illegal sharing of market moving information not shared to public but disclosed by top executives for personal gains to a select group of people.

And, Rajaratnam is at the center of the scheme.

Rajaratnam, 52, is known among investment management community for his technology and healthcare investing strategies and has a long history of successful investing in high growth sectors dating back to early nineties when he worked at Needham & Company.

His trading strategies focused on tech companies that were likely to surprise the market with their earnings miss or excess when compared to market expectations.

Galleon Diversified Fund with assets of $1.2 billion in September 2009 and total asset under management of $3.4 billion. The diversified fund lost money only in 2008 since its inception in 1997 and chalked up 21.75% annual returns compared to 7.8% for the S&P 500 index according to its latest letter to shareholders reviewed by 123jump.com.

Asset managers are under enormous pressure to deliver returns that exceed market returns. The sheer competitive nature and the rapid trading in the age of milliseconds driven program-trading have traders look for information advantage through non-traditional strategies.

Galleon Management at its peak managed $7 billion and was sought after for its above average returns in technology and healthcare sectors. Six funds managed by the company have positive returns so far in the year ending in September with the Diversified Fund gaining 22.27%.

The regulators at SEC and FBI have stepped their investigation of investment industry after the Bernard Madoff scandal.

U.S. Attorney Preet Bharara at a press conference said that this was the first hedge fund case where court authorized wiretaps were used and he left with the impression that it may become a standard tool at SEC to investigate securities fraud.

Reviewing court papers, the alleged insider trading scheme may have been entrenched well before the beginning of the current investigation in 2007 and may be widespread than few that have been charged with.

Rajaratnam was known in the industry to make outsized bets on few select stocks and many have yielded outsized gains in the past before the investigation began. The prosecution is expected to bring additional charges against Rajaratnam as they file more evidence in the court.

“He is not the master of the universe. He is a master of the Rolodex,” said Robert Khuzami, director of enforcement at the Securities and Exchange Commission.

Rajaratnam was born in Sri Lanka and obtained a masters degree from Wharton School of Management, University of Pennsylvania and is one of the most active investors on the Colombo Stock Exchange as well.

Forbes estimated Rajaratnam with a net worth of $1.3 billion and ranked him as the 559th wealthiest person in the U.S. in its latest report. However in court, Rajaratnam said he was worth $200 million.

Rajaratnam in the past has actively contributed to various Democratic candidates campaigns including those of Charles Schumer and Hillary Rodham Schumer and $87,000 to President Barack Obama’s campaign.

However, his largest contribution of $3.5 million was made to the Tamil Rehabilitation Organization, linked to the Tamil terrorist group LTTE and was later banned by the U.S. Treasury. He also donated to clear land mines in the war torn regions of Sri Lanka.

Authorities also charged three executives at Intel, Mckinsey & Company Inc and IBM.

Rajiv Goel, 51, an employee of the treasury department at Intel located in Los Gatos, California, Anil Kumar, 51, a director of McKinsey and Robert Moffat, 53, senior vice president at IBM.

Two others who worked at New Castle, the hedge fund group that once was operating under Bear Stearns Asset Management Inc were also charged.

Danielle Chiesi at New Castle who played a key role in providing information linked to Akamai and Sun Microsystems and president of New Castle Mark Kurland.

The regulators allege that Rajaratnam used the insider information obtained from the people charged to trade for the benefit of funds managed by Galleon that yielded $18 million of profits.

According to the charges, Chiesi obtained information from sources at Akamai Technologies and Goel provided insights into the restructuring at Advanced Micro Devices and from Moffat at IBM related to earnings.

The taped conversation transcripts released in the court filings show that Rajaratnam sought insider information from multiple sources that focused on short term results ahead of earnings release.

The prosecution built its case with the help of an unnamed informant who is hoping to get a lesser sentence.

According to a cooperating witness at the time of the interview for a job position at Galleon, Rajaratnam asked “if the Tipper A had inside information about any public companies.”

The cooperating witness known as Tipper A after a brief work history at Galleon in the late nineties sought to work again in 2005 with Rajaratnam and had known him since 1996.

Prosecutors allege that Galleon and others have benefited to tune of $12.7 million based on sources about information related to Polycom Inc, Google Inc and information related to the sale of Hilton Hotels Corp.

Galleon Group released a statement after the arrest that noted the following.

“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.”