U.S. charges billionaire Rajaratnam with record insider trading

Reuters, Wednesday, 14 Oct 2009 07:51pm EDT,By Grant McCool and Edith Honan

NEW YORK (Reuters) - Billionaire hedge fund founder Raj Rajaratnam and five executives from some of the most prestigious U.S. companies were charged on Friday with the largest hedge fund insider-trading scheme ever.

Investigators said they used court-approved telephone wire taps for the first time in a Wall Street insider trading case, sending shivers through the hedge fund industry which has traditionally picked up and shared trading tips to make big profits.

At the center of the case are executives from hedge funds Galleon and New Castle, which was a unit of Bear Stearns Asset Management, and executives from major American companies such as IBM, top consulting firm McKinsey & Co and chip giant Intel Corp.

"This is not a garden-variety insider trading case," Preet Bharara, the U.S. Attorney for Manhattan, said at a news conference. He said the scheme made more than $20 million in illegal profits over several years.

One of the criminal complaints accuses Rajaratnam, 52, considered the richest Sri Lankan in the world, of conspiring with Intel employee Rajiv Goel and Anil Kumar, a director of powerful management consulting firm McKinsey & Co. The alleged offenses took place over three years starting in January 2006.

Galleon had as much as $7 billion under management, the complaint said. Intel Capital is the investment arm of Intel.

A second criminal complaint accused three other people -- Danielle Chiesi, Mark Kurland and Robert Moffat -- of insider trading crimes and earning millions of dollars in illegal profits.

"It shows that we are targeting white-collar insider trading rings with the same powerful investigative techniques that have worked so successfully against the mob and drug cartels," Bharara said.

All six were charged with securities fraud and conspiracy in two criminal complaints filed in U.S. District Court in New York.

They are under arrest and they were also charged in a separate civil complaint by the U.S. Securities and Exchange Commission (SEC). The SEC said the accused traded on insider information from 10 companies.

SCHEME TARGETED TOP COMPANY STOCKS

The companies included Hilton Hotels Corp, Google Inc, IBM, Advanced Micro Devices Inc and several other companies.

The prosecutor also fired a warning shot for the rest of Wall Street.

"Today, tomorrow, next week, the week after, privileged Wall Street insiders who are considering breaking the law will have to ask themselves one important question: Is law enforcement listening?" he said.

Securities fraud charges carry possible maximum prison sentences of up to 20 years.

Whitney Tilson, founder and managing partner of T2 Partners LLC and the Tilson Mutual Funds said: "I'm not surprised that among 8,000 hedge funds there will always be a few rogues behaving badly. It's quite stunning somebody who is already a billionaire could be so foolish."

She said that for the "few dishonest hedge funds, it hopefully it will serve as a big wake up call."

"Galleon was shocked to learn today that Raj Rajaratnam was arrested this morning at his apartment," Galleon Group LP said in a statement. "We had no knowledge of the investigation before it was made public and we intend to cooperate fully with the relevant authorities. Galleon continues to operate and is highly liquid."

Rajaratnam, born into a family of well-to-do Tamils in the Sri Lankan capital of Colombo, is one of the largest investors on the Colombo Stock Exchange.

Last month, he pledged $1 million to help pay for the rehabilitation of former soldiers of the separatist "Tamil Tigers," which fought 25 years to create a separate state for Sri Lanka's minority Tamils but were defeated in May.

But on Friday, he was handcuffed and walked in front of TV cameras as federal agents arrested him.

An Intel spokesman said Goel, 51, an employee of its treasury department, was placed on administrative leave on Friday morning. He said Intel was not aware of the case until Friday and has not been contacted by authorities.

Kumar, also 51, was on a leave of absence, a McKinsey spokeswoman said. She said the firm "was looking into the matter urgently."

Chiesi, 43, worked for New Castle, an equity hedge fund group of Bear Stearns Asset Management before Bear Stearns crumbled in March 2008, according to the complaint. Kurland, 60, was a senior managing director of BSAM, the same unit that ran two funds that suffered fatal mortgage market losses in 2007.

Moffat, 53, was group executive of IBM's systems and technology group and a 31-year veteran of the company. Moffat was accused of passing insider information about an IBM deal with Advanced Micro Devices Inc. An IBM spokesman declined to comment.

The Galleon case also dealt another black eye for credit rating firm Moody's Corp Moody's Investors Service, one of the major rating agencies that have been strongly criticized for their role in the global credit crisis.

An analyst at Moody's who was involved with evaluating Hilton passed on insider information that Hilton would be acquired by Blackstone Group and that Hilton would likely announce the acquisition before July 4, 2007, according to one complaint. A Moody's spokesman said the firm would provide investigators with assistance in its investigation of the matter.

(Reporting by Grant McCool and Joseph Giannone; Additional reporting by Edith Honan, Walden Siew and Ritsuko Ando in New York, Clare Baldwin in San Francisco, and Bryson Hull in Colombo, Sri Lanka; Editing by Phil Berlowitz, John Wallace and Bernard Orr)

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