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Galleon fears raised in 2001

Date: Friday, October 30, 2009
Author: Henry Sender, FT.com

Concerns about the business practices of Galleon hedge fund founder Raj Rajaratnam and his associates were raised inside JPMorgan Chase as far back as 2001, according to an internal company document seen by the Financial Times.

Mr Rajaratnam and five others – including former employees of Bear Stearns, now part of JPMorgan – were charged this month in an alleged insider trading scheme that US prosecutors called the biggest ever involving hedge funds.

Mr Rajaratnam has strongly denied the charges against him and plans to defend himself against the accusations.

The 2001 “call note” written by an analyst at JPMorgan’s alternative asset management arm said the unit “should reduce our allocation” in Galleon’s flagship technology fund, citing what it described as “more negative news about Raj and his cohorts”.

Analysts at JPMorgan’s asset management unit are encouraged to spot problems with hedge funds and are rewarded with trophies for doing so. An internal warning was made in a similar manner about Bernard Madoff by analysts, according to a person familiar with the matter.

A JPMorgan spokesman declined to comment on whether its asset management arm followed its analyst’s 2001 advice in the Galleon case or whether it acted on the analyst’s concerns.

The “call note” on Galleon recounts a meeting between the JPMorgan analyst, who has since left the bank, and a “friend” who was identified as a former colleague of Mr Rajaratnam, at his previous firm, Needham & Co. The analyst credited “one of our managers” for supplying the name of the former associate of Mr Rajaratnam.

The analyst said the former associate offered a “great deal of colour” about Mr Rajaratnam’s activities at Needham. The analyst expressed concerns that the former associate of Mr Rajaratnam “has an axe to grind” but described the meeting as “another indication” that JPMorgan should reduce its allocation to Galleon.

The JPMorgan note alleges that the principals of Galleon “liked to operate in the ‘grey areas’” of the markets. “If these allegations are true, there are some serious issues about business conduct,” the memo said.

After JPMorgan bought the business of Bear Stearns in 2008, it acquired additional exposure to Galleon, since the hedge fund dealt with Bear. The extent of that exposure is still being established, another JPMorgan spokesman said.

JPMorgan and Galleon declined to comment.