Billionaire hedge fund founder Raj Rajaratnam and executives from some of the most prestigious US companies were charged on Friday with the largest hedge fund insider-trading scheme ever.
Investigators said they used court-approved telephone wiretaps 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 last year, but is still in operation.
Three executives from major US companies IBM Corp, 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 US Attorney for Manhattan, said at a news conference.
He said the scheme made more than US$20 million in illegal profits over several years.
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 US$7 billion under management, the complaint said.
Early on Friday evening, a US magistrate judge in New York said Rajaratnam could be released on a US$100 million personal recognizance bond secured by US$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 177km from Manhattan and Rajaratnam, a citizen of both Sri Lanka and the US, 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 US District Court in Manhattan. Kumar was permitted to be released on a US$5 million bond, Kurland on a US$3 million bond, and Moffat and Chiesi on a US$2 million bond. In California, Goel posted US$300,000 cash for bail.
The six were also charged in a separate civil complaint by the US Securities and Exchange Commission (SEC). The SEC said the accused traded on insider information from 10 companies.
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.
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