Billionaire hedge fund founder Raj Rajaratnam and executives from some of the most prestigious U.S. companies were charged on Friday with the largest hedge fund insider-trading scheme ever.
Investigators said they used court-approved telephone wire taps for the first time in a Wall Street insider trading case, sending shivers through the hedge fund industry which has traditionally picked up and shared trading tips to make big profits.
At the center of the case are Rajaratnam, his Galleon hedge fund and two executives from hedge fund New Castle, which was a unit of Bear Stearns Asset Management before Bears Stearns Cos collapsed in 2008, but is still in operation.
Three executives from major American companies IBM , top consulting firm McKinsey & Co and the venture capital arm of chip giant Intel Corp are also facing criminal charges.
"This is not a garden-variety insider trading case," Preet Bharara, the U.S. Attorney for Manhattan, said at a news conference. He said the scheme made more than $20 million in illegal profits over several years. here
One of the criminal complaints accuses Rajaratnam, 52, considered the richest Sri Lankan in the world, of conspiring with Intel Capital treasury department managing director Rajiv Goel and Anil Kumar, a director of McKinsey & Co. The alleged offenses took place over three years starting in January 2006.
Galleon had as much as $7 billion under management, the complaint said.
Early on Friday evening, a U.S. magistrate judge in New York said Rajaratnam may be released on a $100 million personal recognizance bond secured by $20 million in cash and property.
In a brief appearance, Rajaratnam sat in court with his arms folded. The judge restricted his travel to a radius of 110 miles from Manhattan and Rajaratnam, a citizen of both Sri Lanka and the United States, surrendered travel documents.
A prosecutor argued that Rajaratnam was a flight risk, but his lawyer Jim Walden said: "A court's going to learn there's a lot more to this case. There is no way that this man is going to flee."
A second criminal complaint accused three other people -- New Castle portfolio manager Danielle Chiesi, New Castle general partner Mark Kurland and Robert Moffat, a senior vice president in the IBM technology group -- of insider trading crimes and earning millions of dollars in illegal profits.
"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," Bharara said.
All six were charged with securities fraud and conspiracy in two criminal complaints filed in U.S. District Court in Manhattan. Kumar was permitted to be released on a $5 million bond, Kurland on a $3 million bond, and Moffat and Chiesi on a $2 million bond. In California, Goel posted $300,000 cash for bail.
The six were also charged in a separate civil complaint by the U.S. Securities and Exchange Commission (SEC). The SEC said the accused traded on insider information from 10 companies.
SCHEME TARGETED TOP COMPANY STOCKS
The companies included Hilton Hotels Corp, Google Inc, IBM, Advanced Micro Devices Inc and several other companies.
The prosecutor also fired a warning shot for the rest of Wall Street.
"Today, tomorrow, next week, the week after, privileged Wall Street insiders who are considering breaking the law will have to ask themselves one important question: Is law enforcement listening?" he said.
Securities fraud charges carry possible maximum prison sentences of up to 20 years.
Whitney Tilson, founder and managing partner of T2 Partners LLC and the Tilson Mutual Funds said: "I'm not surprised that among 8,000 hedge funds there will always be a few rogues behaving badly. It's quite stunning somebody who is already a billionaire could be so foolish."
She said that for the "few dishonest hedge funds, it hopefully will serve as a big wake up call."
Rajaratnam, born into a family of well-to-do Tamils in the Sri Lankan capital of Colombo, is one of the largest investors on the Colombo Stock Exchange.
Last month, he pledged $1 million to help pay for the rehabilitation of former soldiers of the separatist "Tamil Tigers," which fought 25 years to create a separate state for Sri Lanka's minority Tamils but were defeated in May.
But on Friday, he was handcuffed and walked in front of TV cameras as federal agents arrested him.
"Galleon was shocked to learn today that Raj Rajaratnam was arrested this morning at his apartment," Galleon Group LP said in a statement. "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."
An Intel spokesman said Goel, 51, was placed on administrative leave on Friday. He said Intel was not aware of the case until Friday and has not been contacted by authorities.
Kumar, also 51, was on a leave of absence, a McKinsey spokeswoman said. She said the firm "was looking into the matter urgently."
Chiesi, 43, worked for New Castle, an equity hedge fund group of Bear Stearns Asset Management before Bear Stearns crumbled in March 2008, according to the complaint. Kurland, 60, was a senior managing director of BSAM, the same unit that ran two funds that suffered fatal mortgage market losses in 2007. Representatives for New Castle could not reached for comment.
Moffat, 53, was group executive of IBM's systems and technology group and a 31-year veteran of the company. Moffat was accused of passing insider information about an IBM deal with Advanced Micro Devices Inc. An IBM spokesman declined to comment.
The Galleon case also dealt another black eye for credit rating firm Moody's Corp Moody's Investors Service, one of the major rating agencies that have been strongly criticized for their role in the global credit crisis.
An analyst at Moody's who was involved with evaluating Hilton passed on insider information that Hilton would be acquired by Blackstone Group and that Hilton would likely announce the acquisition before July 4, 2007, according to one complaint. A Moody's spokesman said the firm would provide investigators with assistance in its investigation of the matter.
The cases are USA v Raj Rajaratnam et al No. 09-mj-2306 and USA v Danielle Chiesi et al No. 09-mj-2307, U.S. District Court for the Southern District of New York.