Friday, October 16, 2009 3 comments ++[ CLICK TO COMMENT ]++

Huge insider trading charges for a technology-focused hedge fund

MarketWatch is reporting that the founder of of Galleon Group, a large technology-focused hedge fund, is being charged in federal courts with insider trading:

Galleon Group's billionaire founder, Raj Rajaratnam, was charged Friday in a sweeping insider-trading case, according to court documents filed in Manhattan by federal prosecutors and the Federal Bureau of Investigation.

Rajaratnam and five others allegedly involved in the scheme have been arrested. A phone message seeking comment that was left at Galleon's New York headquarters Friday morning wasn't returned.

The other defendants are: Rajiv Goel, a managing director at Intel Capital, a unit of Intel Corp.; Robert Moffat, a senior vice president at IBM Corp.; Anil Kumar, a director at consulting firm McKinsey & Co.; Danielle Chiesi, portfolio manager at $1 billion hedge-fund firm New Castle Partners; and Mark Kurland, a senior managing director and general partner at New Castle, which was the equity hedge-fund group of Bear Stearns Asset Management.

"This is not a garden-variety insider trading case," Preet Bharara, U.S. attorney for the Southern District of New York, said during a press conference, adding that it was the largest hedge-fund insider trading case ever charged.

All the defendants were "caught" using wiretaps, according to Bharara, "powerful investigative techniques that have worked so successfully against the mob and drug cartels"


"Raj Rajaratnam is not a master of the universe, but rather a master of the rolodex," Khuzami added in a statement. "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."


The charges allege that Galleon made almost $17 million trading on inside information about Polycom, Hilton, Google, Clearwire, Akamai and PeopleSupport regarding upcoming corporate results, acquisitions and reorganizations.

This is important for two reasons. First of all, this is the largest hedge fund—AUM of supposedly $4 billion—being accused of insider trading. Although a crime is a crime, it is surprising to see such a large firm being embroiled in apparently illegal activities.

Secondly—I wasn't going to post about this except for this—it is interesting that the government is charging somewhat senior officials from various firms such as Intel (a microprocessor company), IBM (a computer services company), and McKinsey (a consulting company). It is possible that there is some grand conspiracy at work, as the government seems to be implying. However, I wouldn't rule out the possibility that the senior employees at these firms didn't know they were giving out material information (yes, I realize that it's still your fault if you give out material information without realizing it, but I'm just wondering if these guys at Intel or whatever were really in this accused scam.)

Finally, as always, everything I have said here, and the government has said, have not been proven in a court of law. We shouldn't assume any one is guilty until proven as such.


3 Response to Huge insider trading charges for a technology-focused hedge fund

October 19, 2009 at 9:01 AM

Thanks for putting light on ths subject

October 19, 2009 at 1:16 PM

The interesting thing about this case is that the actual 'insider information' hasn't been revealed. Did he know the EPS before hand? Possibly, if there are wiretaps involved. This cant be the first case of a hedge fund doing this, Im sure others are as well. Why cant the people know about the conversations Geithner and Paulson had with Lloyd Blankfien before the bailout? Why isnt the SEC working on checking if there is fraud occuring with High Frequency Trading, frontrunning in Treasury auctions..etc? Unfortunately the big banks are too powerful to get a meaningful investigation. Its good that the SEC is trying harder now but in my opinion this is a small fish to fry considering he only made 20 million on that particular trade. 

There are a lot of hedge funds that hire people from a particular sector/industry because of their expertise in a particular field. Also, many hedge funds talk to upper management as well to try to get an insight on how the company is doing. Im wondering what is considering 'crossing the line'? Obviously company results is over the line, but it will be interesting to see what information was given to the hedge fund.

Sivaram Velauthapillai
October 19, 2009 at 2:15 PM

It's amazing that a billionaire would be involved in this. Either he is arrogant or dumb, or both. But as you suggested, this may be so common that he took it for granted.

In any case, it looks like Raj broke the law. I'll post about it later but the government released wiretap captures showing how two of the accused knew they were doing something illegal.

Regardless of what the truth is, we need less of these criminals. They hurt small investors and damage the transparency of capital markets...

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