Rajaratnam’s FBI Probe a Decade Ago Lacked Proof of Fraud

Date: Monday, December 7, 2009
Author: Linda Sandler and Joel Rosenblatt, Bloomberg

Raj Rajaratnam, the Galleon Group LLC founder fighting federal insider-trading charges, was probed a decade ago by the FBI, which said in 2002 it couldn’t tie him to illegal stock sales related to confidential documents sent to him by an Intel Corp. employee, court filings show.

Rajaratnam was involved with ex-Intel employee Roomy Khan in a “scheme to defraud” the world’s largest chipmaker by stealing pricing and sales data, according to prosecutors’ filings unsealed in California this week. “Independently obtained evidence” corroborated information from Khan, who was sentenced to three years probation in 2002 after pleading guilty to wire fraud, the filings said.

“Based on information obtained to date, Rajaratnam cannot be tied to illegal insider trading connected to the Intel information,” investigators said in the filing. “He also did not provide any monetary payment for the information.”

Khan, 51, who also once worked at Galleon, is the government’s star witness in an insider trading case brought last month against Rajaratnam, in which she has again pleaded guilty. Khan’s earlier offense began in 1998 when she worked for Intel as a product marketing engineer, prosecutors said.

Rajaratnam, 52, was arrested on Oct. 16 and accused by federal prosecutors of earning millions of dollars from stock trades made with inside information from corporate executives.

The U.S. Securities and Exchange Commission filed parallel civil lawsuits against him and more than 20 other hedge fund executives and corporate insiders, in many cases basing claims on telephone calls covertly recorded by criminal authorities.

Two related insider trading circles made $53 million in illegal profits, federal authorities have estimated.

Good News and Bad

Rajaratnam and several news media companies asked the judge to unseal the earlier case against Khan.

“It’s probably both good news and bad news and can be spun either way,” said Barry Pollack, a white-collar defense lawyer at Miller & Chevalier in Washington. “The government is going to spin it as it demonstrates the depth of their relationship and it demonstrates there’s a lengthy pattern or practice of him trading on information that he at a minimum should have reason to question the source.”

Khan’s lawyer, Stanislao German, didn’t return a call seeking comment. Rajaratnam’s lawyer, John Dowd, declined to comment. Rebekah Carmichael, a spokeswoman for Manhattan U.S. Attorney Preet Bharara, declined to comment.

Defending himself last month against SEC charges, Rajaratnam said in a court filing he had an innocent explanation for his trades, based on research by Galleon analysts and on published media reports. He challenged the SEC’s use of evidence from wiretaps and assailed Khan as unreliable.

Information Access

At Intel, Khan had access to closely guarded information on orders for chips from several dozen personal computer makers, as well as the number of chips shipped. From such data, “one could discern Intel’s probable financial performance for the current and subsequent quarter,” according to the unsealed documents.

Concerned about possible leaks in early 1998, Intel set up a hidden video camera at the office fax machine. On March 6 and March 24, it recorded Khan faxing the so-called book to billing reports for Intel Pentium processors for the prior week, plus information on the average selling price and units sold in the first quarter.

“By multiplying these numbers, one can determine Intel’s total revenue for the quarter,” according to the documents.

Prosecutors have said one of the informants in Rajaratnam’s current case is co-defendant Rajiv Goel, who worked at Intel. He has denied wrongdoing.

SEC Trial

The criminal case against Rajaratnam has yet to move past preliminary stages, while the SEC’s case is assigned to a judge who has scheduled a trial for Aug. 2, 2010. The judge may decide whether the evidence from wiretaps may be admitted at the trial.

Rajaratnam is likely to use a similar defense in both the civil and criminal cases, lawyers said.

Khan in 2002 was ordered to serve six months of her sentence in home detention and pay $150,000 in restitution and fines. She was allowed to travel and attend meetings, including a Goldman Sachs Group Inc. investor conference, according to court papers.

In the current case, Khan is free on $500,000 bail. Prosecutors said that from 2004 to 2007, Khan conspired with at least eight people to trade on secret tips gleaned from company insiders and others.

Takeover Bids

Khan allegedly passed on to Rajaratnam and others proprietary details in 2007 about pending takeover bids for Hilton Hotels Corp. and Kronos Inc., plus a tip that Google Inc.’s earnings would be lower than expected, according to court documents.

Khan started cooperating with the government in its current insider trading probe of hedge funds in November 2007, according to court documents. Rajaratnam is free on $100 million bail.

U.S. prosecutors in civil and criminal court papers outline a network of corporate insiders, hedge fund executives, and others who passed along or traded on confidential news. Five of the 20 people charged including Khan are aiding the U.S. probe.

One of the defendants, Anil Kumar, is no longer working at McKinsey & Co., a firm spokeswoman said yesterday.

Kumar, a former director at McKinsey, is accused of leaking confidential tips to Rajaratnam. McKinsey, which was probing Kumar, said in an e-mailed statement that he left the firm on Nov. 30.

“We have concluded our internal investigation and can confirm that Anil Kumar is no longer with our firm,” Yolande Daeninck, a spokeswoman for the New York-based management consulting firm, said in statement. “We are unable to go into further details about this matter as there are ongoing U.S. legal proceedings.”

Kumar has denied wrongdoing. His lawyer, Robert Morvillo, declined to comment yesterday.

The case is SEC v. Galleon Management LP, 09-cv-8811, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.net. Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net.