Billionaire among 6 nabbed in inside trading case.
Wall Street wake-up call: Hedge fund boss, 5 others charged in $25M-plus
insider trading case
NEW YORK (AP) -- One of America's wealthiest men was among six hedge fund
managers and corporate executives arrested Friday in a hedge fund insider
trading case that authorities say generated more than $25 million in illegal
profits and was a wake-up call for Wall Street.
Raj Rajaratnam, a portfolio manager for Galleon Group, a hedge fund with up to
$7 billion in assets under management, was accused of conspiring with others to
use insider information to trade securities in several publicly traded
companies, including Google Inc.
U.S. Magistrate Judge Douglas F. Eaton set bail at $100 million to be secured
by $20 million in collateral despite a request by prosecutors to deny bail. He
also ordered Rajaratnam, who has both U.S. and Sri Lankan citizenship, to stay
within 110 miles of New York City.
U.S. Attorney Preet Bharara told a news conference it was the largest hedge
fund case ever prosecuted and marked the first use of court-authorized wiretaps
to capture conversations by suspects in an insider trading case.
He said the case should cause financial professionals considering insider
trades in the future to wonder whether law enforcement is listening.
"Greed is not good," Bharara said. "This case should be a wake-up call for Wall
Street."
Joseph Demarest Jr., the head of the New York FBI office, said it was clear
that "the $20 million in illicit profits come at the expense of the average
public investor."
The Securities and Exchange Commission, which brought separate civil charges,
said the scheme generated more than $25 million in illegal profits.
Robert Khuzami, director of enforcement at the SEC, said the charges show
Rajaratnam's "secret of success was not genius trading strategies."
"He is not the master of the universe. He is a master of the Rolodex," Khuzami
said.
Galleon Group LLP said in a statement it was shocked to learn of Rajaratnam's
arrest 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," the statement said.
The firm added that Galleon "continues to operate and is highly liquid."
Rajaratnam, 52, was ranked No. 559 by Forbes magazine this year among the
world's wealthiest billionaires, with a $1.3 billion net worth.
According to the Federal Election Commission, he is a generous contributor to
Democratic candidates and causes. The FEC said he made over $87,000 in
contributions to President Barack Obama's campaign, the Democratic National
Committee and various campaigns on behalf of Hillary Rodham Clinton, U.S. Sen.
Charles Schumer and New Jersey U.S. Sen. Robert Menendez in the past five
years. The Center for Responsive Politics, a watchdog group, said he has given
a total of $118,000 since 2004 -- all but one contribution, for $5,000, to
Democrats.
The Associated Press has learned that even before his arrest, Rajaratnam was
under scrutiny for helping bankroll Sri Lankan militants notorious for suicide
bombings.
Papers filed in U.S. District Court in Brooklyn allege that Rajaratnam worked
closely with a phony charity that channeled funds to the Tamil Tiger terrorist
organization. Those papers refer to him only as "Individual B." But U.S. law
enforcement and government officials familiar with the case have confirmed that
the individual is Rajaratnam.
At an initial court appearance in U.S. District Court in Manhattan, Assistant
U.S. Attorney Josh Klein sought detention for Rajaratnam, saying there was "a
grave concern about flight risk" given Rajaratnam's wealth and his frequent
travels around the world.
His lawyer, Jim Walden, called his client a "citizen of the world," who has
made more than $20 million in charitable donations in the last five years and
had risen from humble beginnings in the finance profession to oversee hedge
funds responsible for nearly $8 billion.
Walden promised "there's a lot more to this case" and his client was ready to
prepare for it from home. Rajaratnam lives in a $10 million condominium with
his wife of 20 years, their three children and two elderly parents. Walden
noted that many of his employees were in court ready to sign a bail package on
his behalf.
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. He lives in New York.
According to a criminal complaint filed in U.S. District Court in Manhattan,
Rajaratnam obtained insider information and then caused the Galleon Technology
Funds to execute trades that earned a profit of more than $12.7 million between
January 2006 and July 2007. Other schemes garnered millions more and continued
into this year, authorities said.
Bharara said the defendants benefited from tips about the earnings, earnings
guidance and acquisition plans of various companies. Sometimes, those who
provided tips received financial benefits and sometimes they just traded tips
for more inside information, he added.
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."
The agent said he learned from federal authorities that Rajaratnam had a ticket
to fly from Kennedy International Airport to London on Friday and to return to
New York from Geneva, Switzerland next Thursday.
Also charged in the scheme are Rajiv Goel, 51, of Los Altos, Calif., a director
of strategic investments at Intel Capital, the investment arm of Intel Corp.,
Anil Kumar, 51, of Santa Clara, Calif., a director at McKinsey & Co. Inc., a
global management consulting firm, and Robert Moffat, 53, of Ridgefield, Conn.,
senior vice president and group executive at International Business Machines
Corp.'s Systems and Technology Group.
The others charged in the case were identified as Danielle Chiesi, 43, of New
York City, and Mark Kurland, 60, also of New York City.
According to court papers, Chiesi worked for New Castle, the equity hedge fund
group of Bear Stearns Asset Management Inc. that had assets worth about $1
billion under management. Kurland is a top executive at New Castle.
Kumar's lawyer, Isabelle Kirshner, said of her client: "He's distraught." He
was freed on $5 million bail, secured in part by his $2.5 million California
home.
Kerry Lawrence, an attorney representing Moffat, said: "He's shocked by the
charges."
Bail for Kurland was set at $3 million while bail for Moffat and Chiesi was set
at $2 million each. Lawyers for Moffat and Chiesi said their clients will plead
not guilty. The law firm representing Kurland did not immediately return a
phone call for comment.
A message left at Goel's residence was not immediately returned. He was
released on bail after an appearance in California.
A criminal complaint filed in the case shows that an unidentified person
involved in the insider trading scheme began cooperating and authorities
obtained wiretaps of conversations between the defendants.
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.
Prosecutors charged those arrested Friday with conspiracy and securities fraud.
A separate criminal complaint in the case said Chiesi and Moffat conspired to
engage in insider trading in the securities of International Business Machines
Corp.
According to another 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.
* By Larry Neumeister and Candice Choi, Associated Press Writers
* On 7:35 pm EDT, Friday October 16, 2009
Associated Press Writers Tom Hays in Riverside, Calif., and Beth Fouhy in New
York contributed to this story.
