Six charged in $20m insider trade case

Billionaire investor Raj Rajaratnam and present and former executives of Bear Stearns, IBM, Intel and McKinsey were charged on Friday in an alleged insider trading scheme that US prosecutors called the biggest ever involving hedge funds.

In 1997, when the Sri-Lankan born Raj Rajaratnam launched his hedge fund Galleon Technologies, he told a journalist his favourite quote - one borrowed from Intel’s totemic President Andy Grove: “only the paranoid survive.”

Galleon – and Mr Rajaratnam – have to date proved to be consumate survivors.

In mid-2008, with close to $8.3bn in assets, Galleon Group was one of the larger hedge funds on Wall Street and it rewarded its principal and founder with money that put him in the top-flight of hedge fund billionaires.

Mr Rajaratnam was estimated to have received $200m in 2007 alone from Galleon, making him that year one of the best-paid hedge fund managers in the world. Last month - in spite of the financial crisis - his wealth was such that Forbes Magazine named him the 236th richest man in America.

A Tamil, Mr Rajaratnam received an English boarding school education and a degree in engineering from the University of Sussex before turning to the US and to finance.

After receiving an MBA from Wharton, he joined the boutique investment bank Needham & Co in New York in the early 80’s and became its president by 1991. In 1992 Mr Rajaratnam set up an in-house hedge fund at the bank to invest in technology stocks.

In 1997, as the alternative asset industry began to boom, Mr Rajaratnam left Needham and took the technology fund - renamed Galleon Technology - with him.

The same fund, which remains at the core of Galleon’s business today, has delivered stellar returns to investors since its foundation. Before the collapse of Lehman Brothers last year, the fund boasted an annualised return of 23 per cent for its clients.

Now, however, suspicion has been cast on those returns by criminal charges filed by the FBI against Mr Rajaratnam.

Law enforcers allege Mr Rajaratnam was part of an insider-dealing ring that profited from price-sensitive information unavailable to the wider market - information that almost exclusively concerns technology stocks.

The implications for Galleon are huge. Although the charges relate only to a handful of securities, specific to only a couple of Galleon’s funds, investors are likely to take flight at any inference of wrongdoing.

The charges are not, however, Galleon’s first run in with the law.

In May 2005 Galleon paid a $2.4m fine to settle a case brought about by the US market regulator, the SEC. Galleon, it was alleged, alongside two other prominent hedge funds, had made illegal gains by breaking market manipulation regulations.

Some investors say they were wary of investing with Galleon since. “We couldn’t get comfortable with some of their valuations,” one large money manager told the Financial Times. ”Their general attitude seemed to be ‘trust us, we’re Galleon’.”

In a possible sign of escalating federal efforts to uncover white collar crime, Preet Bharara, US attorney in Manhattan, said the case marked the first time court-authorised wire taps – a traditional tool of investigators pursuing mob bosses and drug kingpins – had been used in a significant insider trading case.

Mr Bharara said the investigation, aided by an unnamed co-operating witness, was continuing. He said the charges “should be a wake up call for every hedge fund manager and every Wall Street trader and every corporate executive who is even thinking about engaging in insider trading”.

Prosecutors claimed Mr Rajaratnam, founder of the Galleon hedge fund, and others used insider information from sources inside hedge funds, public companies, Moody’s Investors Service and an investor relations firm to trade ahead of earnings announcements, acquisitions and joint venture deals.

The alleged scheme, which ran from 2006 until earlier this year, involved trades in companies including Google, IBM, Sun Microsystems and Hilton and produced profits of more than $20m, most of which went to Mr Rajaratnam, according to federal prosecutors. The Securities and Exchange Commission, which brought civil charges, put the proceeds of the scheme at more than $25m.

Among those charged with trading on and providing tips were Mr Rajaratnam; Danielle Chiesi, an employee of New Castle, a hedge fund set up by Bear; and Mark Kurland, a New Castle executive who formerly served as Bear’s head of research and asset management.

Some alleged offences occurred after Bear – and New Castle – were acquired by JPMorgan Chase in March last year. New Castle, which faces civil charges filed by the SEC, was separated from JPMorgan in late 2008.

Among those charged with providing inside information were Robert Moffat, a senior vice-president at IBM; Rajiv Goel, a director in strategic investments at the investment arm of Intel; and Anil KumarAnil Kumar, a director at McKinsey.

Mr Kumar said he was shocked by the complaint and emphatically denied all charges.

Moody’s said last night: “Moody’s has strict policies against divulging confidential information, and the alleged wrongdoing by an individual at Moody’s would be an egregious violation of Moody’s policies and values.”

Mr Rajaratnam, named this year as the 236th richest American by Forbes, was due to fly to London yesterday, according to court documents, with a return flight to New York from Geneva scheduled for October 22