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Galleon’s Rajaratnam Charged in Insider Trading Scam

By David Glovin, Katherine Burton and David Scheer

Raj Rajaratnam, the billionaire founder of Galleon Group, and former directors at a Bear Stearns Cos. hedge fund were among six people charged in a $20 million insider trading scheme federal prosecutors called the biggest ever involving hedge funds.

Prosecutors also arrested Rajiv Goel, who worked at Intel Capital as a director in strategic investments, Anil Kumar, who worked as a director at McKinsey & Co., and IBM Corp. executive Robert Moffat. The former officials at Bear Stearns Asset Management are Danielle Chiesi and Mark Kurland, who were affiliated with the firm’s New Castle Partners, which managed about $1 billion.

“The defendants operated in a world of, you scratch my back, I’ll scratch your back,” U.S. Attorney Preet Bharara in Manhattan said at a press conference today. “Greed, sometimes, is not good.”

It’s the largest ever hedge fund insider trading case, Bharara said. It’s the first time wiretaps have been used to target insider trading, signaling the government will now use the same tools against Wall Street that it employs in organized crime and drug cases, he said. Bharara called the case “unprecedented.”

Hearing

At a hearing before Magistrate Judge Douglas Eaton this afternoon, prosecutors said there’s evidence of a “veritable smorgasbord of insider trading activities” and cited “grave concern” that Rajaratnam would flee. They asked Eaton to put him in jail.

Rajaratnam is a diabetic, supports his parents and isn’t going to flee, his lawyer Jim Walden of Gibson Dunn & Crutcher said. Galleon may close if its founder goes to jail, Walden said. Eaton is still weighing his bail ruling and said Rajaratnam may be freed tonight on $100 million bond.

Kumar’s bail of $5 million was secured by his home in California, and his wife co-signed the bond. Kumar’s passport was seized.

Tips came from insiders and others at hedge funds, investor relations firms, and companies including Intel, IBM, McKinsey, and companies whose shares were traded in the scheme, Bharara said. The prosecutor said the investigation was continuing and declined to say whether others would be charged.

Plane Ticket

Rajaratnam and his firm earned from $17 million to $18 million from the fraud, Bharara said. In recent days, he may have been aware he was under investigation. According to one of two criminal complaints filed today, he told an acquaintance that he believed a former Galleon employee was wearing a “wire.” Rajaratnam bought a plane ticket on Oct. 14 for travel to London today, the complaint says.

“Galleon was shocked to learn today that Raj Rajaratnam was arrested this morning at his apartment,” the firm said in a statement. “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 Securities and Exchange Commission also today sued Rajaratnam for engaging in insider trading. The SEC’s complaint said that Rajaratnam didn’t deserve his reputation for “genius trading strategies” or “astute study of company fundamentals or marketplace trends.”

Master of the Rolodex

“Raj Rajaratnam is not a master of the universe, but rather a master of the Rolodex,” Robert Khuzami, director of enforcement at the SEC, said at the press conference. “He cultivated a network of high-ranking corporate executives and insiders, and then tapped into this ring to obtain confidential details about quarterly earnings and takeover activity.”

Rajaratnam, 52, a graduate of the University of Pennsylvania’s Wharton School, was identified this year by Forbes as the 559th richest person in the world, with a net worth of $1.3 billion. Galleon Partners is based in Manhattan and has offices in London, Singapore, Mumbai, and Menlo Park, California. He faces 13 fraud and conspiracy counts, many of which carry 20-year maximum sentences.

Rajaratnam lives in New York City, as do Chiesi, 43, and Kurland, 60. Goel is 51 and lives in Los Altos, California. Kumar is also 51 and lives in Santa Clara, California. Moffat, 53, lives in Ridgefield, Connecticut.

Kurland’s attorney, Lawrence Iason, didn’t immediately return calls.

Arrested

Five of the defendants were arrested in the New York City area and are to appear today in Manhattan court today. Goel was arrested in California.

“My client is shocked and distraught,” said Kerry Lawrence, Moffat’s lawyer, in an interview in court today. He said his client learned only this morning of the U.S. investigation.

The six are charged with using insider information in two overlapping schemes to trade in shares of companies including Google Inc., Polycom Inc., Hilton Hotels Corp. and Advanced Micro Devices Inc., according to the complaints.

Prosecutors said they’ve been investigating the case since at least November 2007, when a person they don’t name in the complaint began meeting with agents of the Federal Bureau of Investigation. The person, who has pleaded guilty and is cooperating with authorities, had used inside information to trade securities and tipped Rajaratnam since 2006, prosecutors said.

Phone Recordings

The person, who had sought a job at Galleon in 2005, helped prosecutors by “making consensual recordings of four telephone conversations” with Rajaratnam, the complaint says.

Authorities say they have other taped conversations of the billionaire as well. On March 7, 2008, the government got court approval to intercept a cell phone Rajaratnam used, according to one of the complaints. Prosecutors said they’ve also been listening to two of Chiesi’s landlines since August 2008.

“A number of the calls intercepted over the wiretap consist of Rajaratnam either providing, receiving, or seeking material nonpublic information about various publicly traded companies,” a complaint says.

Prosecutors say Rajaratnam traded in 2006 and 2007 on leaks from insiders at Polycom, Moody’s Investors Services Inc. and Market Street Partners. A Moody’s analyst offered news about Hilton, and the Market Street Partners source provided tips about Google, prosecutors said. Rajaratnam earned $12.7 million on the leaks and gave a confidential government informant inside information on other companies in return, they said.

Intel Insider

Goel, who had been working in the treasury of Intel Corp., the world’s biggest chipmaker, passed along news about Clearwire Corp. that he learned from investments made by Intel, and Rajaratnam earned about $579,000 in profits, prosecutors said.

In return, “Rajaratnam placed profitable trades for the benefit of Goel in a personal brokerage account maintained by Goel at Charles Schwab,” Bharara said in a statement.

In another alleged scheme, Chiesi got secret tips from an unidentified person at Akamai Technologies Inc. and from Moffat, who passed along information about IBM, Sun Microsystems Inc., and Advanced Micro Devices Inc, one of the complaints says. Chiesi passed along the tips to Kurland and the two traded on the news, the complaint says.

These tips generated others, prosecutors said, as Chiesi passed them onto to Rajaratnam, who in turn gave Chiesi inside information about AMD and other companies, prosecutors said.

Akamai Guidance

The complaint quotes from conversations between Chiesi and Rajaratnam, including a July 24, 2008, discussion that they had after she spoke to the Akamai executive. That day, Akamai stock had closed at $32.18.

“Akamai,” Chiesi told Rajaratnam, according to the complaint. “They’re gonna guide down. I just got a call from my guy.”

After Chiesi said that the company would bring the stock down to $25 a share, Rajaratnam replied that he would be “radio silent” and asked when Akamai would report, the complaint says.

“Just keep shorting every day,” Chiesi responded, the complaint says. “We got a lot of days.”

The complaint also quotes from a conversation on or about August 27, 2008, between Chiesi and a co-conspirator not named as a defendant.

Martha Stewart

“You just gotta trust me on this,” Chiesi is quoted as saying. “Here’s how scared I am about what I’m gonna tell you on AMD.” Chiesi and the co-conspirator talk a little more and Chiesi says, “I swear to you in front of God, you put me in jail if you talk.” Still later, she’s quoted as saying “I’m dead if this leaks. I really am … and my career is over. I’ll be like Martha f---ing Stewart.”

Chiesi was arrested at her Manhattan apartment this morning, said her attorney, Alan Kaufman of Kelley Drye Warren. “She was pretty shook up,” he said.

Kumar gave Rajaratnam tips about a McKinsey’s clients, and Moffat tipped Chiesi about an AMD venture in Abu Dhabi in which IBM participated, the complaints allege.

“The firm was distressed to learn that Mr. Kumar was arrested and is looking into the matter urgently,” said McKinsey spokeswoman Yolande Daeninck.

Goel “has been placed on administrative leave as we look into this matter,” said Chuck Mulloy, an Intel spokesman. The company has started its own investigation and will cooperate if contacted by the authorities, he said.

Moody’s Comment

“The alleged wrongdoing by an individual at Moody’s would be an egregious violation of Moody’s policies and values,” said Michael Adler, a spokesman for the rating company, in an e- mailed statement. Moody’s will help the government with its investigation, he said.

IBM spokesmen Ian Colley and Ed Barbini did not immediately respond to phone and e-mail messages seeking comment.

Galleon, which started as a hedge fund firm focusing on technology and health-care stocks, grew to more than $5 billion in 2001 from its start in January 1997. Rajaratnam founded Galleon with three other colleagues from Needham & Co., an investment bank that focused on technology and health-care companies. None of the other co-founders are still at the firm, according to a Galleon marketing document.

Galleon Management, the company’s advisory business, oversaw more than $2.6 billion at the end of March, mostly on behalf of hedge funds, according to regulatory filings it submitted to the SEC at the time. Rajaratnam held a 50 percent to 75 percent controlling stake in the advisory, the documents show.

The cases are U.S. v. Rajaratnam, 09-02306, and U.S. v. Chiesi, 09-mag-2307, U.S. District Court, Southern District of New York (Manhattan). [courtesy: Bloomberg.com]

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