Hedge Fund Manager Charged with Insider Trading

SEC Brings Case Against Raj Rajaratnam

Below is another case of a hedge fund manager who was alledgedly engaged in insider trading. The SEC seems particularly excited about this cased because of the high profile nature of the manager who was involved. The major charge is against Raj Rajaratnam who reportedly has a net worth in excess of $1 billion and who is a member of the Forbes 400 richest persons in the world.

There will undoubtedly be continued press in this case which is not good news for the hedge fund industry. The industry has been subject to criticism and increased calls for regulation for the last year and high profile cases like this one only serve to rile up members of congress. The SEC seems to be particularly proud about this “catch” as the agency has itself been under increasing scrutiny as the details of the fumbled Madoff case have been made public.

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SEC Charges Billionaire Hedge Fund Manager Raj Rajaratnam with Insider Trading

FOR IMMEDIATE RELEASE
2009-221

High-Ranking Corporate Executives Also Charged in Scheme That Generated More Than $25 Million in Illicit Gains

Washington, D.C., Oct. 16, 2009 — The Securities and Exchange Commission today charged 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 & Company.

The SEC’s complaint, filed in federal court in Manhattan, alleges that Rajaratnam 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, N.Y. — a portfolio manager at New Castle Funds.
  • Rajiv Goel of Los Altos, Calif. — a managing director at Intel Capital, an Intel subsidiary.
  • Anil Kumar of Saratoga, Calif. — a director at McKinsey & Company.
  • Mark Kurland of Mount Kisco, N.Y. — a Senior Managing Director and General Partner at New Castle.
  • Robert Moffat of Ridgefield, Conn. — a senior vice president at IBM.
  • New Castle Funds LLC — a New York-based hedge fund

According to the SEC’s complaint, Rajaratnam and Galleon traded on inside information about the following events or transactions:

  • An unnamed source, identified in the SEC’s complaint as Tipper A, obtained inside information about earnings announcements at Polycom and Google, as well as a takeover announcement of Hilton. Tipper A then allegedly provided this information to Rajaratnam, who used it to trade on behalf of Galleon.
  • Goel provided inside information to Rajaratnam about certain Intel quarterly earnings and a pending joint venture concerning Clearwire Corp., in which Intel had invested. Rajaratnam then used this information to trade on behalf of Galleon. As payback for Goel’s tips, Rajaratnam, or someone acting on his behalf, executed trades in Goel’s personal brokerage account based on inside information concerning Hilton and PeopleSupport, which resulted in nearly $250,000 in illicit profits for Goel.
  • Kumar obtained inside information about pending transactions involving AMD and two Abu Dhabi-based sovereign entities, which he shared with Rajaratnam. Rajaratnam then traded on the basis of this information on behalf of Galleon.
  • Chiesi obtained inside information from an executive at Akamai Technologies and traded on the information on behalf of a New Castle fund, netting a profit of approximately $2.4 million. Chiesi also passed on the inside information to Rajaratnam, who then traded on behalf of Galleon.

The SEC also alleges that Moffat provided inside information to Chiesi about Sun Microsystems. Moffat obtained the information when IBM was contemplating acquiring Sun. Chiesi then allegedly traded on the basis of this information on behalf of New Castle, making approximately $1 million in profits.

The SEC’s complaint charges each of the defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and, except for Kumar and Moffat, violations of Section 17(a) of the Securities Act of 1933 and. The complaint seeks a final judgment permanently enjoining the defendants from future violations of the above provisions of the federal securities laws, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and ordering them to pay financial penalties. The complaint also seeks to permanently prohibit Goel, Kumar and Moffat from acting as an officer or director of any registered public company.

The SEC acknowledges the assistance and cooperation of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

The SEC’s investigation is continuing.

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For more information, contact:
David Rosenfeld
Associate Director, SEC’s New York Regional Office
(212) 336-0153

Sanjay Wadhwa
Assistant Director, SEC’s New York Regional Office
(212) 336-0181

http://www.sec.gov/news/press/2009/2009-221.htm

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Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog.  Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund.  If you are a hedge fund manager who is looking to start a hedge fund or if you are a current hedge fund manager with questions about the securities laws, please contact us or call Mr. Mallon directly at 415-868-5345.

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