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6 accused of insider trading after wiretapping investigation

Among those accused of insider trading include Raj Rajaratnam, the founder of the $7-billion hedge fund Galleon Group, and two executives at California firms Intel and McKinsey & Co.

October 17, 2009|Walter Hamilton and Martin Zimmerman

NEW YORK AND LOS ANGELES — Federal authorities shook the often secretive world of hedge funds with the arrests Friday of the billionaire founder of a major New York operation and five others on charges they engaged in extensive insider trading that allegedly netted more than $20 million in illicit profits.

After taking the unusual step of using wiretaps in the investigation, authorities accused Raj Rajaratnam, the founder of the $7-billion hedge fund Galleon Group, two executives at California companies and three others of multiple counts of conspiracy and securities fraud.

It's the biggest criminal case involving hedge fund insider trading, said Preet Bharara, the U.S. attorney for Manhattan, and is believed to be the first time that court-authorized wiretaps have been used in insider-trading cases.

"This aggressive use of wiretaps is important. It shows that we are targeting white-collar insider trading rings with the same powerful investigative tools that have worked so successfully against the mob and drug cartels," Bharara said.

For The Record
Los Angeles Times Wednesday, October 21, 2009 Home Edition Main News Part A Page 4 National Desk 1 inches; 58 words Type of Material: Correction
Hedge fund case: An article in Business on Saturday about the arrests of hedge fund billionaire Raj Rajaratnam and five others misidentified two of the defendants, Danielle Chiesi and Mark Kurland, as associated with Newcastle Partners in Greenwich, Conn. They were with New Castle Partners in New York, the majority of which is now called New Castle Funds.

Jacob Frenkel, a former federal prosecutor now in private practice, noted the trend: "In the aftermath of the financial crisis, we're seeing a re-direction of criminal enforcement attention toward Wall Street using aggressive methods," he said.

Hedge funds are open only to institutions and wealthy individuals and employ a wider range of trading activities than other investment funds.

The defendants included Rajiv Goel, 51, of Los Altos, managing director of strategic investments in Intel Corp.'s treasury division, and Anil Kumar, 51, of Santa Clara, a director at management-consulting giant McKinsey & Co.

Among the stocks the defendants traded in, according to authorities, were Google Inc., Advanced Micro Devices Inc. and Hilton Hotels Corp.

Separately, the Securities and Exchange Commission filed a civil complaint against the defendants. Together, the federal actions portray a cross-country ring in which highly placed executives passed on chunks of information gleaned from their jobs.

At the center was Rajaratnam, one of the world's wealthiest men. He is worth $1.3 billion and is the world's 559th richest person, according to Forbes magazine. His allegedly illegal trading earned $12.7 million for Galleon, authorities said.

"What we have uncovered in the trading activities of Raj Rajaratnam is that the secret of his success is not genius trading strategies," said Robert Khuzami, the SEC's enforcement chief. "Rajaratnam is not a master of the universe, but rather a master of the Rolodex."

An attorney for Rajaratnam couldn't be reached for comment.

His company released a statement saying it was "shocked" to learn of his arrest 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 said.

Goel was placed on administrative leave, said Intel spokesman Chuck Mulloy, and the Santa Clara, Calif., company launched an internal investigation. The federal actions create "a whole series of questions for us," such as whether Intel's own stock was part of the insider-trading case, he said.

A McKinsey spokeswoman said the firm was "distressed" to learn about Kumar's arrest and was looking into the matter "urgently." The firm declined to elaborate, but a person with knowledge of the situation said Kumar, a senior partner working at McKinsey's Silicon Valley office, had been placed on administrative leave.

"Anil Kumar is as shocked as everyone who knows him to see his name on this complaint," Kumar's attorneys said in a statement, adding that their client "emphatically denies" the charges.

The other defendants are Danielle Chiesi and Mark Kurland of hedge fund Newcastle Partners in Greenwich, Conn., and Robert Moffat, a senior vice president in charge of server business for IBM Corp. in Armonk, N.Y. Attorneys for Chiesi, Kurland and Moffat couldn't be reached.

According to the SEC, Goel gave Rajaratnam information about Intel's quarterly earnings and about a joint venture with Clearwire Corp., a wireless broadband technology company. In exchange, Rajaratnam made $250,000 by trading shares of Hilton and PeopleSupport Inc. in Goel's private account at Charles Schwab, the agency alleged.

The criminal case is based partly on information provided by an informant who had traded tips with Rajaratnam. The informant has pleaded guilty and agreed to wear a wire to record conversations with Rajaratnam.

Wiretaps are expensive and time-consuming, requiring FBI agents to listen to hours of phone calls.

"You don't see wiretaps used frequently in securities investigations," said Steve Peikin, the former head of the securities fraud unit at the Manhattan U.S. attorney's office. "The use of wiretaps reflects that the government thinks this is serious conduct involving a significant amount of money."

Among the conversations recorded was a July 2008 phone call in which Chiesi told Rajaratnam that Akamai Technologies Inc. in Cambridge, Mass., was going to lower its earnings projections.

"They're gonna guide down," Chiesi allegedly said. "I just got a call from my guy."

In a call a month later, Chiesi pressed Moffat to keep quiet about information they were allegedly sharing about a reorganization at Advanced Micro.

"You put me in jail if you talk," Chiesi said, adding, "I'm dead if this leaks. I really am . . . and my career is over. I'll be like Martha [expletive] Stewart."

Bharara said the use of wiretaps is a potent weapon that should make insiders consider whether the government is listening to them.

"As the defendants . . . learned the hard way," he said, "they may have been privy to a lot of confidential corporate information, but there was one secret they did not know: We were listening."

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walter.hamilton@latimes.com

martin.zimmerman@latimes.com

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