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Saturday, October 17, 2009

Galleon Case Ushers in Wiretaps for Financial Crimes (Update1)

U.S. prosecutors who used wiretaps to make their insider trading case against billionaire Raj Rajaratnam, founder of hedge fund firm Galleon Group, said they will use similar tactics to fight future crimes on Wall Street.

U.S. Attorney Preet Bharara in Manhattan said yesterday that the Justice Department will employ the same kind of electronic surveillance traditionally reserved for organized crime, drug syndicates and terrorism prosecutions. Bharara, whose office has jurisdiction over the headquarters of some of the world’s biggest financial firms, said investigators relied on wiretaps to build a case against Rajaratnam and former directors at a Bear Stearns Cos. hedge fund.

“What’s very unusual is that the case is built on wiretaps,” said Robert Mintz, a former federal prosecutor and partner in the Newark, New Jersey, office of the law firm McCarter & English. “You need very specific and timely evidence of criminal activity before a judge is going to let you go up on a wiretap.”

Rajaratnam, 52, faces 13 fraud and conspiracy counts, many of which carry 20-year maximum sentences. Under federal sentencing guidelines, he faces 10 years in prison if convicted at trial, Assistant U.S. Attorney Josh Klein said in court yesterday. Galleon Partners, based in Manhattan, has offices in London, Singapore, Mumbai, and Menlo Park, California.

$20 Million

Mintz said the alleged $20 million scheme is the most elaborate insider-trading ring discovered since the 1980s when the government began using criminal laws to prosecute such allegations.

“This was an extensive web of insider trading built upon years of contacts and strategically placed people,” the former prosecutor said. “Typically, insider trading cases are much more narrowly focused on some significant deal that’s leaked from one or two sources. The more people who have knowledge, the more potential that the scheme will be uncovered.”

Also arrested yesterday were 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. Prosecutors called it the biggest insider trading case involving hedge funds.

‘Scratch My Back’

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

He said the prosecution is the first time wiretaps have been used to target insider trading, calling the case “unprecedented.”

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.

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 U.S. Securities and Exchange Commission at the time. Rajaratnam held a 50 percent to 75 percent controlling stake, according to the documents.

$100 Million Bail

At yesterday’s court hearing, U.S. Magistrate Judge Douglas Eaton in Manhattan set Rajaratnam’s bail at $100 million, to be secured by $20 million in assets and guaranteed by his wife and four others. Rajaratnam, who gave up his passport, may not travel more than 110 miles from New York City.

Klein asked Eaton to hold Rajaratnam in jail pending his trial. He said the hedge fund manager had “enormous incentive” to flee to his native Sri Lanka or elsewhere. The prosecutor said there’s additional evidence, there may be more charges against Rajaratnam and that the case is “overwhelming.”

Rajaratnam told court officials after his arrest that he was worth $200 million, Klein said in court, adding that the hedge fund founder is a billionaire.

Defense attorney Jim Walden said prosecutors are misconstruing the evidence against Rajaratnam and that the case isn’t as strong as they allege.

“This is a simple insider trading case,” Walden said.

The other defendants arrested in New York were also freed after posting bonds between $2 million and $5 million. Goel was arrested in California, the government said.

‘Shocked’ at Arrest

Alan Kaufman, the attorney for Chiesi, 43, said in an interview that his client was “shocked” at her arrest yesterday and will plead innocent. Kurland’s attorney, Lawrence Iason, and Moffett’s lawyer, Kerry Lawrence, also said their clients aren’t guilty.

“Anil Kumar is as shocked as everyone else who knows him to see his name in this complaint,” his lawyer, Charles Clayman, said in a statement. “He emphatically denies these charges.”

According to prosecutors, tips to Rajaratnam 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 alleged scheme.

Bharara said the investigation was continuing.

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, the government said. According to one of two criminal complaints filed yesterday in Manhattan federal court, Rajaratnam 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 yesterday, according to the complaint.

Galleon ‘Highly Liquid’

“Galleon was shocked to learn today that Raj Rajaratnam was arrested this morning at his apartment,” the firm said yesterday in a statement. “We intend to cooperate fully with the relevant authorities. Galleon continues to operate and is highly liquid.”

The SEC yesterday sued Rajaratnam for allegedly engaging in insider trading. Rajaratnam didn’t deserve his reputation for “genius trading strategies” or “astute study of company fundamentals or marketplace trends,” according to the SEC complaint.

“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.”

559th Richest Person

Rajaratnam, 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.

Rajaratnam lives in New York City, as do Chiesi, 43, and Kurland, 60. Goel, 51, lives in Los Altos, California, and appeared in court yesterday in California. A message left for Goel at his home wasn’t returned. Kumar is 51 and lives in Santa Clara, California. Moffat, 53, lives in Ridgefield, Connecticut.

The six defendants 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.

Investigating Since 2007

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 the government said has pleaded guilty and is cooperating with authorities, used inside information to trade securities and had tipped Rajaratnam since 2006, prosecutors said.

The person, who had sought a job at Galleon in 2005, helped federal investigators by “making consensual recordings of four telephone conversations” with Rajaratnam, according to court papers.

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

“There are numerous conversations that are recorded that very clearly depict the fact that this defendant engaged in a veritable smorgasbord of insider trading activities,” Klein said in court. He added that Rajaratnam instructed colleagues to create e-mails designed to hide his source of information and “would make trades intended to mask his illegal activity.”

Leaks From Insiders

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.

Goel, who had been working in the treasury of Intel, 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.

Secret Tips

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

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, according to the government.

The complaint quotes conversations between Chiesi and Rajaratnam, including a July 24, 2008, discussion that they allegedly had after she spoke to the person at Akamai. 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, according to the complaint.

‘Just Keep Shorting’

“Just keep shorting every day,” Chiesi responded, prosecutors said. “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.

“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, prosecutors said, and Chiesi states, “I swear to you in front of god, you put me in jail if you talk.” Later, the government said, 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.”

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 alleged.


Yolande Daeninck, a spokeswoman for McKinsey, said the firm is “distressed” by Kumar’s arrest. Chuck Mulloy, an Intel spokesman, said the company is investigating and has put Goel on leave. Moody’s said in a statement that it’s cooperating with prosecutors. A call to the main number of Market Street Partners, a San Francisco investor relations firm, wasn’t returned. IBM spokesmen Ian Colley and Ed Barbini didn’t respond to messages seeking comment.

The cases are U.S. v. Rajaratnam, 09-02306, and U.S. v. Chiesi, 09-02307, U.S. District Court for the Southern District of New York (Manhattan).

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