On Friday, the US Securities and Exchange Commission (SEC) charged the Sri Lankan-born hedge fund billionaire Raj Rajaratnam and his New York-based hedge fund advisory firm Galleon Management LP with engaging in a massive insider trading scheme that generated more than $25 million in illicit gains. The SEC also charged six others involved in the scheme, including senior executives at major companies IBM, Intel and McKinsey & Co. The development is expected to lead to further cases.
Rajaratnam, founder of the Galleon Group, who was among several wealthy Sri Lankans in the US whose donations to a Maryland-based charity, which were passed to the Liberation Tigers of Tamil Eelam, were part of an earlier investigation according to The Wall Journal, tapped into his network of friends and close business associates to obtain insider tips and confidential information about corporate earnings or takeover activity at several companies, including Google, Hilton and Sun Microsystems.
He then used the non-public information to illegally trade on behalf of Galleon.
“This complaint describes a web of fraud that has been unraveled,” said SEC Chairman Mary L. Schapiro.
“What we have uncovered in the trading activities of Raj Rajaratnam is that the secret of his success is not genius trading strategies. He is not the astute study of company fundamentals or marketplace trends that he is widely thought to be. Raj Rajaratnam is not a master of the universe, but rather a master of the rolodex,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.“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.”
In addition to Rajaratnam and Galleon, the SEC’s complaint charges:
Danielle Chiesi of New York, New York - - a portfolio manager at New Castle Funds.
Rajiv Goel of Los Altos, California - - a managing director at Intel Capital, an Intel subsidiary.
Anil Kumar of Saratoga, California - - a director at McKinsey & Company, management consultants.
Mark Kurland of Mount Kisco, New York - - a Senior Managing Director and General Partner at New Castle.
Robert Moffat of Ridgefield, Connecticut -- a senior vice president at IBM.
New Castle Funds LLC - - a New York-based hedge fund
Bloomberg News says federal investigators are gearing up to file charges against a wider array of insider-trading networks, some linked to to Rajaratnam.
Bloomberg says the pending crackdown, based on at least two years of investigation, targets securities professionals including hedge- fund managers, lawyers and other Wall Street players, the people said, declining to be identified because the cases aren’t public. Some probes, like the one that focused on Rajaratnam, rely on wiretaps. Others stem from a secret SEC data-mining project set up to pinpoint clusters of people who make similar well-timed stock investments.
The New York Times says several of Galleon’s employees had an engineering background, like him. Many outside analysts envied the extensive research reports their counterparts at Galleon produced, culled from regulatory filings, checkups on supply chains and sources within the companies they covered. At its peak, the firm managed $7 billion in assets, but that figure has since fallen to about $3.7 billion.
The Times said the firm made no secret that its investors included technology executives. Among them was Anil Kumar, a McKinsey director who did consulting work for Intel chip rival Advanced Micro Devices and was charged in the scheme. Another defendant, Rajiv Goel, is an Intel executive who is accused of leaking information about the chip maker’s earnings and an investment in Clearwire.
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