October 16, 2009 , 10:27 AM

John Marshall Mantell for The New York Times
Raj Rajaratnam, the founder of Galleon Group, on his way to Manhattan federal court.

Update | 12:08 a.m. DealBook’s Michael de la Merced has more on the Rajaratnam insider trading case in this New York Times article.

Update | 5:11 p.m. Raj Rajaratnam was ordered to post a $100 million bond as part of his bail conditions, though prosecutors argued for no bail because he posed a flight risk. Anil Kumar was released on a $5 million bond.

The founder of the Galleon Group, a big New York hedge fund, was charged on Friday with insider trading in the stocks of several companies, including Advanced Micro Devices, Clearwire and Akamai, earning about $20 million in the process.

Federal prosecutors for the Southern District of New York accused Raj Rajaratnam, 51, with illegally obtaining and trading on information on these companies, which also included Polycom, Hilton Hotels, Google and People Support. He was charged with four counts of conspiracy and nine counts of securities fraud. (Read the complaints after the jump.)

The prosecutors’ case is built on both statements from an unnamed cooperating witness, who has agreed to plead guilty, and from the recording of four conversations between the witness and Mr. Rajaratnam. The unnamed witness began conversations with the Federal Bureau of Investigation in 2007, which led to the phone taps.

At a press conference Friday afternoon, law enforcement officials described the case as a sign that the Justice Department, the Federal Bureau of Investigation and the Securities and Exchange Commission were stepping up their efforts against white-collar crime. Preet Bahara, the United States attorney for the Southern District of New York, compared the investigation to those used against the Mafia and drug cartels.

“This case should serve as a wake-up call to Wall Street and to every hedge fund manager,” Mr. Bahara said. “These people were privy to inside information, but they didn’t know one secret, that we were listening.”

Others charged by prosecutors include Mark Kurland, the president of New Castle Partners, another large money manager; Danielle Chiesi, a former Bear Stearns executive who now works at New Castle; Rajiv Goel, an executive at Intel’s treasury department who supported the company’s venture capital arm; Anil Kumar, an executive at McKinsey & Company; and Robert Moffatt, an executive at I.B.M.

All six were arrested Friday morning. Five of the six are set to be arraigned in federal court in Manhattan Friday afternoon. Mr. Goel is set to be arraigned in California.

According to the complaint, the witness first approached Mr. Rajaratnam in mid-2005 about divulging nonpublic information. That led to a scheme that ran from January 2006 through July 2007 involving insider information about three companies — Polycom, Hilton and Google — in which the hedge fund executive garnered about $12.7 million in profit. Mr. Rajaratnam reciprocated by supplying inside information about other technology companies.

Mr. Rajaratnam partnered with the likes of Mr. Goel and Mr. Kumar, who supplied information about their portfolio companies or clients, and in turn made profitable trades for these associates. The unnamed cooperating witness is alleged by prosecutors to have also obtained insider information, including from an analyst at Moody’s Investors Service covering Hilton (and who was paid $10,000) and an unnamed employee at Market Street Partners, an investor relations firm working for Google.

Mr. Rajaratnam, a native of Sri Lanka, is listed as No. 551 on Forbes’s 2009 list of the world’s richest people, with an estimated net worth of $1.3 billion.

Law-enforcement officials on Friday said that Mr. Rajaratnam’s success appeared built not on “genius trading strategies,” but on his insider-trading connections.

“He is not a master of the universe,” said Robert Khuzami, the S.E.C.’s director of enforcement. “He is a master of the Rolodex.”

A spokesman for Galleon said in a statement: “Galleon was shocked to learn today that Raj Rajaratnam was arrested this morning at his apartment. 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.”

A spokesman for Moody’s said in a statement: “Moody’s has strict policies against divulging confidential information, and the alleged wrongdoing by an individual at Moody’s would be an egregious violation of Moody’s policies and values. Moody’s fully supports the government’s prosecution of insider trading and will provide every assistance in its investigation of this matter.”

A spokesman for Intel said that Mr. Goel was placed on administrative leave Friday morning, and that the chipmaker had not been aware of the investigation until then. He added that Intel has not been contacted by authorities so far, but is ready to cooperate.

A spokeswoman for McKinsey said in a statement: “The firm was distressed to learn that Mr. Kumar was arrested and is looking into the matter urgently.” She declined to comment on Mr. Kumar’s job status, but a person briefed on the matter said that Mr. Kumar was placed on paid leave.

Representatives for I.B.M. and Market Street Partners declined to comment.

Representatives for Akamai and lawyers for the defendants were not immediately available for comment.

– Michael J. de la Merced. Steve Lohr contributed reporting.

Hedge Fund Chief Is Charged With Fraud

John Marshall Mantel for The New York Times

Raj Rajaratnam being escorted by F.B.I. agents on Friday.

Published: October 16, 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.

John Marshall Mantel for The New York Times

Preet Bharara, the United States attorney, said the charges were “a wake-up call for Wall Street.”

Louis Lanzano/Associated Press; Brendan McDermid/Reuters

Mark Kurland, left, of New Castle Partners and Anil Kumar of McKinsey in custody Friday.

Louis Lanzano/Associated Press

Danielle Chiesi, center, leaving F.B.I. headquarters in New York.

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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