Raj Rajaratnam of Galleon Group arrested in insider trading case

Billionaire Raj Rajaratnam, a partner at hedge fund Galleon Group, is among six nabbed in latest Wall Street scandal.

By , Staff writer

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    Raj Rajaratnam, billionaire founder of the Galleon Group, a major hedge fund, is led in handcuffs from FBI headquarters in New York Friday, Oct.16, 2009. Rajaratnam was charged with insider trading in the stock of several companies including Hilton, Clearwire, and Google.
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Federal authorities have uncovered what they say is the largest case of insider trading ever at a hedge fund – netting an alleged $20 million in illegal profits.

The case centers around billionaire Raj Rajaratnam, a partner at hedge fund Galleon Group. The Federal Bureau of Investigation arrested him on Friday in New York along with five others tied to the case.

It's the latest hit to the reputation of Wall Street, which has also been shaken over the past year by the Bernard Madoff scandal, other Ponzi schemes, and the whirlwinds of controversy surrounding the broader crisis in America's banking system.

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Hedge funds have been touted in recent years to wealthy investors and pension funds as a new "asset class," to be tapped alongside traditional stocks and bonds. Often they rack up solid returns while carefully hedging their bets (hence their name). But they are also secretive, insular, and little-regulated.

Authorities said the arrests Friday show they are pursuing fraud at high levels of Wall Street with the same determination, and the same tools, that they use on drug lords or mobsters.

"This case should be a wake-up call for Wall Street," said Preet Bharara, US Attorney for the Southern District of New York, who announced the arrests along with the FBI. "It should be a wake-up call for every hedge fund manager and every Wall Street trader and every corporate executive who is even thinking about engaging in insider trading."

The six arrested Friday are:

• Mr. Rajaratnam, managing member of Galleon Management and a portfolio manager for Galleon Technology Offshore. His net worth has been listed at $1.3 billion by Forbes magazine, putting him No. 559 in a ranking of the world's wealthiest people.

Danielle Chiesi, an employee of New Castle Funds, formerly the equity hedge fund group of Bear Stearns Asset Management.

Mark Kurland, a top executive at New Castle.

Rajiv Goel of Intel Capital, the investment arm of the high-tech firm Intel Corp.

• Anil Kumar, a director at McKinsey & Co., the management consulting firm.

Robert Moffat, an executive at IBM.

All are charged with participating in insider trading schemes. The FBI said Ms. Chiesi, Mr. Kurland, and Rajaratnam "repeatedly traded on material, nonpublic information" given as tips by insiders at hedge funds and public companies.

"They may have been privy to a lot of confidential corporate information," Mr. Bharara said. "But there was one secret they did not know: We were listening."

The FBI said this was the first time court-authorized wiretaps have been used to target significant insider trading on Wall Street.

The case encompasses alleged use of inside information to trade a range of stocks, including Google, Clearwire, and Hilton Hotels. The charges include illicit profits for Galleon and other hedge funds, and also in a personal account owned by Mr. Goel.

Someone identified only as a "cooperating witness" played a key role. For example, the cooperating witness learned from a Moody's analyst in July 2007 that Hilton was going to be taken private. Using information from the witness, the FBI says, Rajaratnam bought hundreds of thousands of shares of Hilton stock for Galleon, reaping profits of about $4 million for the fund.

Cases of alleged fraud have surfaced in the wake of last year's market dive, as often happens in bear markets. The illicit activities, though, often begin during boom times. In the hedge fund case, the FBI says illegal trading began early in 2006, well before the recession or market downturn.

News of the arrest came in a week when the Dow Jones Industrial Average crossed above 10000 for the first time in a year. The Dow ended Friday below 10000, at 9995.91.

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Rajaratnam is also linked to Sri Lanka money-transfer case.

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