Rajaratnam's arrest can put Galleon Group out of business
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Rajaratnam's arrest can put Galleon Group out of business
New York: In the past, Billionaire Galleon Group Founder Raj Rajaratnam attracted some of Wall Street's savviest investors to his hedge funds. Now his arrest could change the fate of the company and spark fresh calls in Washington for tighter industry regulation. Now investors who once counted themselves lucky for getting access to one of the industry's finest technology hedge funds, may be running for the exits, frightened by news that Rajaratnam was arrested and charged with running the biggest-ever insider trading scheme involving a hedge fund. "This may shutter Galleon. But there is not yet enough information to determine that," said Ron Geffner, a Partner at law firm Sadis and Goldberg LLP, who works with hedge funds and their investors. "I don't think any big investor would hang around and wait for the verdict when they see headlines in the newspaper every day," said one person who invests with hedge funds but asked not be named since he cannot discuss his investments publicly. The headlines are bound to add fresh fuel to calls on Main Street and in corners of Congress to demand new laws for the $1.4 trillion business that has until now not had to report its performance numbers or other information the way mutual funds are required to. With investors still shellshocked from the Bernard Madoff and Allen Stanford Ponzi schemes, hedge fund investors said that many are likely to want to get out as fast you can. A number of pension funds and endowments put money with Rajaratnam, helping the 52-year old billionaire to build Galleon Group into one of the world's biggest hedge funds with $7 billion in assets at its peak last year. U.S. financial regulators said that the fund had $2.6 billion in assets as of March. The 52 year old investor was identified this year by Forbes as the 559th richest person in the world. This case has brought the Indian School of Business (ISB) in spotlight once again for the wrong reason. Among those charged for Insider trading case, Anil Kumar, a Director at consulting firm McKinsey, is on the executive board of the ISB. Kumar, 51, a resident of Saratoga, California, is a friend of Rajaratnam and a direct or indirect investor in certain Galleon funds. Previously, ISB had dealt a blow in January this year after its Dean Mendu Rammohan Rao resigned following widespread protests over his role as a board member of fraud-tainted Satyam Computer Services. According to Bloomberg, prosecutors also arrested Rajiv Goel, who worked at Intel Capital as a Director in strategic investments and IBM Senior Vice President, Robert Moffat. The former officials at Bear Stearns asset management are Danielle Chiesi and Mark Kurland, who were affiliated with the firm's New Castle Partners, which managed about $1 billion. "Following the charge, Moffat has been placed on temporary leave of absence," said IBM. "Greed, sometimes, is not good," said U.S. Attorney Preet Bharara. The case is the largest ever over hedge fund insider - trading. It's the first time wiretaps have been used to target insider trading, signaling the government will now use the same tools against Wall Street that it employs in organized crime and drug cases, he said. Bharara called the case 'unprecedented'. U.S. Magistrate Judge, Douglas Eaton set Rajaratnam's bail at $100 million, to be secured by $20 million in assets and guaranteed by his wife and four others. Rajaratnam cannot travel more than 110 miles from New York City, but he won't be subject to electronic monitoring. Defense attorney Jim Walden said in court that prosecutors are misconstruing the evidence against Rajaratnam and that the case isn't as strong as prosecutors allege. He said that Rajaratnam is a diabetic and supports his parents and won't flee, and he warned that Galleon, which he said managed $8 billion, may be forced to close if Rajaratnam were jailed. Other defendants arrested in New York were freed after posting bonds between $2 million and $5 million. Goel was arrested in California. Alan Kaufman, the attorney for Chiesi, 43, said in an interview that his client was 'shocked' at her arrest this morning and will plead innocent. Kurland's attorney, Lawrence Iason, and Moffett's lawyer, Kerry Lawrence, also said their clients aren't guilty. "Anil Kumar is as shocked as everyone else who knows him to see his name in this complaint," his lawyer, Charles Clayman, said in a statement. "He emphatically denies these charges." Following this case, Indian Finance Minister, P Chidambram announced that during the last two years, Sebi (Securities and Exchange Board of India) initiated actions in 39 cases for insider trading in India. According to prosecutors, tips to Rajaratnam came from insiders and others at hedge funds, investor relations firms, and companies including Intel, IBM, McKinsey, and companies whose shares were traded in the scheme. Bharara said the investigation was continuing and declined to say whether others would be charged. "Galleon was shocked to learn today that Raj Rajaratnam was arrested this morning at his apartment," the firm 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." The U.S. Securities and Exchange Commission complaint said that Rajaratnam didn't deserve his reputation for "genius trading strategies" or "astute study of company fundamentals or marketplace trends." Prosecutors said that they have been investigating the case since at least November 2007, when a person they don't name in the complaint began meeting with agents of the FBI. The person, who has pleaded guilty and is cooperating with authorities, used inside information to trade securities and had tipped Rajaratnam since 2006, prosecutors said. The person, who had also sought a job at Galleon in 2005, helped prosecutors by 'making consensual recordings of four telephone conversations' with Rajaratnam, the complaint says. "There are numerous conversations that are recorded that very clearly depict the fact that this defendant engaged in a veritable smorgasbord of insider trading activities," Klein said in court. He added that Rajaratnam instructed colleagues to create e-mails designed to hide his source of information and "would make trades intended to mask his illegal activity."

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