Billionaire Bust Rocks Hedge Funds, Community

Date: Tuesday, October 20, 2009
Author: Kent Bernhard, Jr, Portfolio.com

The arrest of Raj Rajaratnam has had worldwide impact, even sending the stock market in his native Sri Lanka tumbling. The impact is felt as new details arise about the investigation that led to the arrest of the hedge fund whiz.

Federal authorities had help from associates of Raj Rajaratnam when it came to investigating the hedge fund billionaire’s alleged insider trading scheme.

The Wall Street Journal reports that sources tell it that Galleon Corp. traders were pushed hard to gather information, and were berated and pushed out if they didn’t come up with the goods. So Galleon developed a web of contacts in the technology and health care fields, and some of those contacts have in turn aided the government in its investigation. Among them are Ali Far and Choo Beng Lee, California hedge fund managers, the Journal reports.

Rajaratnam, when asked over the years about the success of Galleon, which at one time held $7 billion in assets, told questioners he was just hungrier than everybody else, the New York Times reports. “After awhile, money is not the motivation. I want to win every time. Taking calculated risks gets my adrenaline pumping,” he told Lois Peltz for her book, “The New Investment Superstars,” in 2001.

But he went too far, the government alleges, and the arrest of Rajaratnam and five others in a series of insider trading schemes that added up to $20 million has rocked the hedge fund world, where information means power and money. The government’s case is likely to hinge on whether Rajaratnam and his contacts went too far in pursuit of that information.

As the Times reports, hedge funds reach out to lobbyists, investigators, and people with connections to gather the information they need to get an edge in their trades. For the most part, the information is gathered legally.

But the government, embarrassed by the $60 billion Bernard Madoff Ponzi fiasco, is newly aggressive toward Wall Street shenanigans, and willing to go further in its investigations than it has in the past. It used wiretaps in the Rajaratnam insider trading case, the first time that particular tool has been used in such a case.

The insider trading case wasn’t the first time Rajaratnam came to the attention of federal authorities. His name came up in connection with a terrorist-funding investigation before the FBI started investigating him for trading off inside tips from well-connected corporate sources.

Sources tell the Wall Street Journal that 52-year-old Rajaratnam was one of several wealthy Sri Lankans whose donations to a Maryland charity made their way to the rebel Liberation Tigers of Tamil Eelam. The Tamil Tigers fought a vicious insurgency against the government of Sri Lanka until the group was finally defeated and its leader killed this May.

Prosecutors don’t allege that Rajaratnam or others knew their donations to The Tamil Rehabilitation Organization were being funneled to the Tigers.

The Journal reports there isn’t a connection between the charity that allegedly funneled money to the Tigers and Rajaratnam’s alleged involvement in what federal authorities are calling the biggest-ever hedge fund insider trading scheme.

The billionaire hedge fund tycoon’s lawyer, Jim Walden, said his client is innocent of the insider trading charges. And he made many donations meant to help his native Sri Lanka. He helped with money and organization to rebuild homes destroyed by the devastating South Asian tsunami of 2004.

Those weren’t the only charities Rajaratnam has supported, and his arrest has come as a shock to many Indian Americans, the Journal reports. He contributed to such causes as development on the Indian subcontinent and to programs for underprivileged Indian youth in the New York area.

Rajaratnam has been described as the wealthiest Sri Lankan in the world, the Times of India reports. He is of Tamil origin, and holds dual Sri Lankan and U.S. citizenship. He is a graduate of the Wharton School of Business at the University of Pennsylvannia.

He also contributed freely to Democratic politicians, the Journal reports. He gave $26,200 to the Democratic Party’s fundraising arm in 2007, $4,600 to Hillary Clinton’s campaign that same year, and $4,600 to Barack Obama’s presidential bid.

Sri Lanka’s benchmark stock index was set for its biggest decline in four months following the arrest of Rajaratnam, who was one of the south Asian island’s biggest investors, Bloomberg reports.

Federal authorities have charged Rajaratnam and five others, some of them working for some of America’s most respected corporations with running a series of trades based on leaked insider information. The trades, investigators have said, added up to $20 million.

In addition to Rajaratnam, the following people were arrested in Friday: Rajiv Goel, of Intel Corp.; Anil Kumar, a director at global management-consulting firm McKinsey & Co.; Danielle Chiesi and Mark Kurland of New Castle Partners LLC, the one-time equity hedge fund group at Bear Stearns Asset Management Inc.; and Robert Moffat, a senior vice president at IBM.

The case involves the stocks of some of America’s top companies, including Google and Advanced Micro Devices.

Rajaratnam's bail was set at $100 million, secured by $20 million in assets, and guaranteed by his wife and four others. He was also forced to surrender his passport. He had booked two tickets to London upon learning an associate had been wearing a wire before being arrested Friday at his Upper East Side apartment, the New York Post reported. Rajaratnam’s movements were restricted to a 110-mile radius around New York.

Kumar was released on a $5 million bond, Kurland on a $3 million bond, and Moffat and Chiesi were each released on $2 million bond. Goel, who was arrested in California, posted $300,000 cash bail.

Chiesi, Kurland and Moffat’s attorneys said their clients would plead innocent. Galleon officials have said they were shocked by their co-founder’s arrest, and that the firm remained strong and liquid.

Prosecutors say the methods they use to bust Rajaratnam’s ring are a sign of things to come.

For the first time ever in an insider trading case, investigators used wire taps on several of the suspects’ phones to gather evidence, the same kind of tactic more likely in the past to be directed at a member of the Gambino Family than a respected Wall Street trader or corporate executive.

U.S. Attorney Preet Bharara in Manhattan said the fact that such methods were used in this case should be taken as a signal by others on Wall Street that Washington is watching them, and may well be listening as well.

"This case should be a wake up call for Wall Street. 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," he said.

Investigators have been building their case since November 2007.

Walden, though, said prosecutors are overplaying the evidence they have against Rajaratnam and his cohorts. The case isn’t as strong as prosecutors claim, Rajaratnam’s lawyer said.

“This is a simple insider trading case,” Walden told Bloomberg.