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Sunday, 18 October 2009
Hedge Fund Chief Is Charged With Fraud
In all, six people were arrested, accused by prosecutors and the Securities and Exchange Commission of earning more than $20 million from illegal trading in companies like Google, Akamai and Hilton Hotels over nearly three years.
By all appearances, Raj Rajaratnam was a self-made billionaire, having built Galleon Group into a giant hedge fund with a specialty in technology companies.
But prosecutors said on Friday that he had profited not from his trading genius but from his Rolodex, and they arrested him on charges of conspiracy and securities fraud in what they called the biggest insider trading scheme ever involving a hedge fund.
In all, six people were arrested, accused by prosecutors and the Securities and Exchange Commission of earning more than $20 million from illegal trading in companies like Google, Akamai and Hilton Hotels over nearly three years.
Even now, after the discovery of Bernard L. Madoff, the scheme outlined by law enforcement officials is the stuff of Wall Street thrillers, not seen since the days of Ivan Boesky two decades ago. Mr. Rajaratnam is accused of tapping a vast network of informants across a swath of corporate America: a senior official at I.B.M. considered a contender for the top job at that firm; executives of Intel and the consulting firm McKinsey & Company; two former Bear Stearns employees who had moved to a hedge fund, New Castle Partners; and an analyst at Moody’s Investors Service.
While trading secrets, though, one crucial piece of information was not shared — several of the phones were tapped.
The wiretaps were made with the help of an unnamed cooperating witness, a former Galleon employee who was said to ply Mr. Rajaratnam with information originally to land a job. The witness, who began cooperating in November 2007, has agreed to plead guilty in the hopes of receiving a lesser sentence.
“This case should serve as a wake-up call for Wall Street,” Preet Bharara, the United States attorney for the Southern District of New York, said at a news conference on Friday. He added that the investigation was continuing.
Still stinging from criticism that they missed frauds like Mr. Madoff’s, securities regulators working with prosecutors repeatedly pointed to the recorded phone calls as a sign that they were tightening their grip on white-collar crime, comparing the investigation to those against the Mafia and drug cartels.
Mr. Rajaratnam was charged with four counts of conspiracy and nine counts of securities fraud. United States Magistrate Judge Douglas F. Eaton set bail at $100 million.
A lawyer for Mr. Rajaratnam, James Walden of Gibson, Dunn & Crutcher, said, “My client’s innocent and we’re going to fight the charges.”
Robert Khuzami, the S.E.C.’s director of enforcement, said of Mr. Rajaratnam in a news conference, “He is not a master of the universe,” outlining the civil case brought with the criminal case. “He is a master of the Rolodex.”
A spokesman for Galleon said the firm was “shocked” at the arrest and added that it had no knowledge of the investigation before it was made public.
Suggesting that problems may extend beyond a single hedge fund, the informants fed Galleon tips for cash or in some cases for other insider information, officials said. Among the tipsters was the Moody’s analyst, who was paid $10,000; an employee at an investor relations firm working for Google; and Robert W. Moffat Jr., an I.B.M senior vice president for systems and technology. Mr. Moffat, of Ridgefield, Conn., was among those charged. All six defendants are expected to plead not guilty.
One defendant, Rajiv Goel of Los Altos, Calif., told Mr. Rajaratnam in March 2008 that he was tired of working at Intel and would exchange information about a potential investment by the company in Clearwire for a job with one of Mr. Rajaratnam’s “powerful friends.” Mr. Rajaratnam made a profit of $579,000 from trading in Clearwire stock.
One main player in the scheme was Danielle Chiesi, a former Bear Stearns executive who worked at another hedge fund, New Castle Partners. She is accused of supplying tips about companies like Akamai and Sun Microsystems to Mr. Rajaratnam and of illegally trading on the information for her firm.
Closely cooperating with Ms. Chiesi was Mark Kurland, a former senior executive at Bear Stearns Asset Management who is now New Castle’s president and lives in Mount Kisco, N.Y.
Prosecutors say the scheme produced some wildly successful investments. Information leaked about Google’s quarterly results in July 2007 led Mr. Rajaratnam to bet against the company. The trade led to an $8 million profit.
In another trade, advance notice from a Moody’s analyst that Hilton was about to be bought by the Blackstone Group in July 2007 produced a $4 million profit.
Much of the often-salty telephone dialogue captured by federal investigators relates to Akamai and Advanced Micro Devices, the chip maker. Mr. Rajaratnam and Ms. Chiesi drew upon a wealth of insider sources for their investments in the two companies: Anil Kumar, a McKinsey executive working on A.M.D.’s reorganization and a Galleon investor; an unnamed Akamai executive; and Mr. Moffat, a friend of Ms. Chiesi’s who learned of A.M.D. developments through the chip maker’s business ties to I.B.M.
“Danielle, I have a major present for you,” the Akamai executive told Ms. Chiesi late on Oct. 10, 2008, according to court filings. “Information.”
Recorded conversations between Mr. Rajaratnam and Ms. Chiesi appear to show they were aware their information was far beyond what the market knew. “If the two of us weren’t close to the company as we are, would you be long the stock?” Ms. Chiesi asked Mr. Rajaratnam on Aug. 26, 2008, referring to A.M.D. “No. I wouldn’t be,” he responded. She added that she would not have touched the company with a “10-foot pole.”
The two also showed concern about the consequences of their schemes being discovered. On Aug. 27, Ms. Chiesi told an unnamed co-conspirator: “I’m dead if this leaks. I really am and my career is over.”
At one point, Mr. Rajaratnam grew worried that a former employee was wearing a wire, prosecutors said. Earlier this week, he booked a flight for Friday to London from New York. He was arrested at his Manhattan home at 6 a.m. Friday.
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Hedge Fund Chief Is Charged With Fraud
By MICHAEL J. de la MERCED
17 October 2009
By all appearances, Raj Rajaratnam was a self-made billionaire, having built Galleon Group into a giant hedge fund with a specialty in technology companies.
But prosecutors said on Friday that he had profited not from his trading genius but from his Rolodex, and they arrested him on charges of conspiracy and securities fraud in what they called the biggest insider trading scheme ever involving a hedge fund.
In all, six people were arrested, accused by prosecutors and the Securities and Exchange Commission of earning more than $20 million from illegal trading in companies like Google, Akamai and Hilton Hotels over nearly three years.
Even now, after the discovery of Bernard L. Madoff, the scheme outlined by law enforcement officials is the stuff of Wall Street thrillers, not seen since the days of Ivan Boesky two decades ago. Mr. Rajaratnam is accused of tapping a vast network of informants across a swath of corporate America: a senior official at I.B.M. considered a contender for the top job at that firm; executives of Intel and the consulting firm McKinsey & Company; two former Bear Stearns employees who had moved to a hedge fund, New Castle Partners; and an analyst at Moody’s Investors Service.
While trading secrets, though, one crucial piece of information was not shared — several of the phones were tapped.
The wiretaps were made with the help of an unnamed cooperating witness, a former Galleon employee who was said to ply Mr. Rajaratnam with information originally to land a job. The witness, who began cooperating in November 2007, has agreed to plead guilty in the hopes of receiving a lesser sentence.
“This case should serve as a wake-up call for Wall Street,” Preet Bharara, the United States attorney for the Southern District of New York, said at a news conference on Friday. He added that the investigation was continuing.
Still stinging from criticism that they missed frauds like Mr. Madoff’s, securities regulators working with prosecutors repeatedly pointed to the recorded phone calls as a sign that they were tightening their grip on white-collar crime, comparing the investigation to those against the Mafia and drug cartels.
Mr. Rajaratnam was charged with four counts of conspiracy and nine counts of securities fraud. United States Magistrate Judge Douglas F. Eaton set bail at $100 million.
A lawyer for Mr. Rajaratnam, James Walden of Gibson, Dunn & Crutcher, said, “My client’s innocent and we’re going to fight the charges.”
Robert Khuzami, the S.E.C.’s director of enforcement, said of Mr. Rajaratnam in a news conference, “He is not a master of the universe,” outlining the civil case brought with the criminal case. “He is a master of the Rolodex.”
A spokesman for Galleon said the firm was “shocked” at the arrest and added that it had no knowledge of the investigation before it was made public.
Suggesting that problems may extend beyond a single hedge fund, the informants fed Galleon tips for cash or in some cases for other insider information, officials said. Among the tipsters was the Moody’s analyst, who was paid $10,000; an employee at an investor relations firm working for Google; and Robert W. Moffat Jr., an I.B.M senior vice president for systems and technology. Mr. Moffat, of Ridgefield, Conn., was among those charged. All six defendants are expected to plead not guilty.
One defendant, Rajiv Goel of Los Altos, Calif., told Mr. Rajaratnam in March 2008 that he was tired of working at Intel and would exchange information about a potential investment by the company in Clearwire for a job with one of Mr. Rajaratnam’s “powerful friends.” Mr. Rajaratnam made a profit of $579,000 from trading in Clearwire stock.
One main player in the scheme was Danielle Chiesi, a former Bear Stearns executive who worked at another hedge fund, New Castle Partners. She is accused of supplying tips about companies like Akamai and Sun Microsystems to Mr. Rajaratnam and of illegally trading on the information for her firm.
Closely cooperating with Ms. Chiesi was Mark Kurland, a former senior executive at Bear Stearns Asset Management who is now New Castle’s president and lives in Mount Kisco, N.Y.
Prosecutors say the scheme produced some wildly successful investments. Information leaked about Google’s quarterly results in July 2007 led Mr. Rajaratnam to bet against the company. The trade led to an $8 million profit.
In another trade, advance notice from a Moody’s analyst that Hilton was about to be bought by the Blackstone Group in July 2007 produced a $4 million profit.
Much of the often-salty telephone dialogue captured by federal investigators relates to Akamai and Advanced Micro Devices, the chip maker. Mr. Rajaratnam and Ms. Chiesi drew upon a wealth of insider sources for their investments in the two companies: Anil Kumar, a McKinsey executive working on A.M.D.’s reorganization and a Galleon investor; an unnamed Akamai executive; and Mr. Moffat, a friend of Ms. Chiesi’s who learned of A.M.D. developments through the chip maker’s business ties to I.B.M.
“Danielle, I have a major present for you,” the Akamai executive told Ms. Chiesi late on Oct. 10, 2008, according to court filings. “Information.”
Recorded conversations between Mr. Rajaratnam and Ms. Chiesi appear to show they were aware their information was far beyond what the market knew. “If the two of us weren’t close to the company as we are, would you be long the stock?” Ms. Chiesi asked Mr. Rajaratnam on Aug. 26, 2008, referring to A.M.D. “No. I wouldn’t be,” he responded. She added that she would not have touched the company with a “10-foot pole.”
The two also showed concern about the consequences of their schemes being discovered. On Aug. 27, Ms. Chiesi told an unnamed co-conspirator: “I’m dead if this leaks. I really am and my career is over.”
At one point, Mr. Rajaratnam grew worried that a former employee was wearing a wire, prosecutors said. Earlier this week, he booked a flight for Friday to London from New York. He was arrested at his Manhattan home at 6 a.m. Friday.
Steve Lohr contributed reporting.
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