US prosecutors who used wiretaps to make their insider trading case against billionaire Raj Rajaratnam, founder of hedge fund firm Galleon Group, said they will use similar tactics to fight future crimes on Wall Street.
US attorney Preet Bharara in Manhattan said on Saturday the justice department will employ the same kind of electronic surveillance traditionally reserved for organised crime, drug syndicates and terrorism prosecutions. Bharara, whose office has jurisdiction over the headquarters of some of the world?s biggest financial firms, said investigators relied on wiretaps to build a case against Rajaratnam and former directors at a Bear Stearns Cos hedge fund.
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. Rajaratnam, 52, faces 13 fraud and conspiracy counts, many of which carry 20-year maximum sentences. Under federal sentencing guidelines, he faces 10 years in prison if convicted at trial. Galleon Partners, based in Manhattan, has offices in London, Singapore, Mumbai, and Menlo Park, California.
Investigators said they used court-approved telephone wire taps for the first time in a Wall Street insider trading case, sending shivers down the hedge fund industry which has traditionally picked up and shared trading tips to make big profits.
At the centre 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, including Intel Capital treasury department MD Rajiv Goel and Anil Kumar, a director of McKinsey & Co, are also facing criminal charges. The alleged offenses took place over three years starting in January 2006.
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 facing criticised for its role in the global credit crisis. An analyst at Moody?s 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.
?This is not a garden-variety insider trading case,? Preet Bharara, the US attorney for Manhattan, said. He said the scheme made more than $20 million in illegal profits over several years. One of the criminal complaints accuses Rajaratnam, considered the richest Sri Lankan in the world, of conspiring with Goel and Kumar.
Galleon had as much as $7 billion under management, the complaint said.
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 $5-million bond, Kurland on a $3-million bond, and Moffat and Chiesi on a $2-million bond. Goel’s status was not immediately clear.
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, including Hilton Hotels, IBM, Advanced Micro Devices Inc and others. Securities fraud charges carry possible maximum prison sentences of up to 20 years.
?Galleon was shocked to learn today that Raj Rajaratnam was arrested this morning at his apartment,? Galleon Group LP said in a statement on Saturday. ?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.
A Moody’s spokesman said the firm would provide investigators with assistance in its investigation of the matter.