Members of the extended family were inundated with messages of sympathy,solidarity and support from relatives, friends and well-wishers when New York based Hedge fund billionaire and philanthropist Raj (Rajakumar) Rajaratnam was arrested and produced  in a Manhattan court on Friday October 16.

The beleaguered billionaire whose net worth was estimated by “Forbes” to be US$ 1.3 billion faced four charges of conspiracy to commit security fraud  and nine  counts of securities fraud.

The 52-year-old Tamil tycoon is the founder and managing general partner of the Galleon group of  funds. According to “forbes” Rajaratnam  is the 551st richest man in the world and 236th richest in the USA.

FIGHTER

A senior family member while acknowledging and responding gratefully to the supportive messages had this observation about Raj –“ His spirits are high. He is a fighter and plans to fight these allegations all the way.”

Rajaratnam who went to work on Monday October 19  made a passionate speech  to employees declaring his innocence. He then issued a short statement from his Madison Avenue  office addressing employees and investors  . Emphasizing  his innocence , Rajaratnam stated   that he would fight back resolutely and clear himself of charges.

This is what he said in that note  –

Dear Galleon Employees, Clients and Friends:

During this challenging time, I wanted to take a moment to address you directly. As I am sure you understand, I am not able to respond in detail to the charges recently brought against me. But let me be clear: they are, without exception, entirely baseless. I am innocent and will vigorously defend myself and our firm.

As I move forward on my defense, I want to assure you that our commitment to our investors and employees will remain unwavering. I will continue to be here working for Galleon, and the firm will continue to serve its clients with effectiveness and integrity. Thank you for your ongoing support.

Sincerely,

Raj

INNOCENT

Two days later on Wednesday October  21 ,Rajaratnam issued a second note to employees, clients and friends. This is what it said –

Dear Galleon Employees, Clients and Friends,

I have decided that it is now in the best interest of our investors and employees to conduct an orderly wind down of Galleon’s funds while we explore various alternatives for our business. At this important time, I want to reassure investors of the liquidity of our funds and assure Galleon employees that we are seeking the best way to keep together what I believe is the best long / short equity team in the business.

As many of you know, we have built our business on the fundamental belief in rigorous investment analysis combined with active trading around core positions. We have encouraged and invited our investors to attend our daily research morning meetings. Many of you have done so and got a first hand look at our process. This research process is the core of our investment and trading strategy.

The privilege of managing investors’ capital is a responsibility that I have always taken very seriously. I want to reiterate that I am innocent of all charges and will defend myself against these accusations with the same intensity and focus I have brought to managing our investors’ capital.

For those who have been my partners and supporters over the last 17 years, I sincerely thank you. I also want to thank you for the innumerable expressions of support I have received from you over the past few days.

Sncerely

Raj Rajaratnam

Rajaratnam’s intention of an “orderly wind down of Galleon’s funds” while exploring “ various alternatives for our business” seemed the most responsible and prudent course to be adopted in view of prevailing circumstances.

LIQUIDATION

Despite the overwhelming expression of support and loyalty by employees and clients there was a painful reality  to deal with. Although the charges against Rajaratnam were at present mere “accusations” and he was presumed to be innocent unless otherwise proven guilty, the harsh world of hedge funds was not prepared to hedge its bets on this count.

At least three of the chief 14 brokerage firms with which Galleon did business had broken off relations. Many clients had begun making redemption claims. It was roughly estimated that redemption requests  in three days days  amounted to about 1. 3 billion the total  3.7 billion funds. The fate of employees was also in the balance.

Under those circumstances the sad yet best available option  was to begin a process of liquidation thereby protecting investor clients on the one hand and negotiate a sale of the group on the other thus ensuring  jobs for the employees.

If this could be accomplished with as minimum damage as possible Rajaratnam could emerge from this ordeal singed but not burnt. Thereafter he could face the charges against him in court and prove if possible his innocence. If Rajaratnam can do so there is always the chance of him bouncing back in a few years   with his reputation intact.

By Oct 27, 90 per cent of funds had been liquidated. It is to be noted that the security fraud charges against Rajaratnam relate to unfair advantages gained through insider trading. He is not facing any charge of de-frauding clients, employees or investors.

Arguably the insider trading charges can also be construed as a manifestation of excessive zeal on the part of Rajaratnam to procure for his clients the best possible returns on their investment.

JUSTICE DEPT

The  US Department  of Justice issued on October 16 a press release on the arrests of six persons including Raj Rajaratnam. Here are some excerpts –

Preet Bharara, the U.S. Attorney for the Southern District of New York, and Joseph Demarest, Jr., Assistant Director-in-Charge of the New York Office of the FBI, today announced charges against six individuals arising out of their alleged involvement in the largest hedge fund insider trading case in history.

The defendants include: Raj Rajaratnam, the Managing Member of Galleon Management, LLC (Galleon), and a portfolio manager for Galleon Technology Offshore, Ltd.; Danielle Chiesi, an employee of New Castle Funds, LLC (New Castle), formerly the equity hedge fund group of Bear Stearns Asset Management, Inc.; Mark Kurland, a top executive at New Castle; Rajiv Goel, a Director in Strategic Investments at Intel Capital, the investment arm of Intel Corporation (Intel); Anil Kumar, a Director at McKinsey & Company, Inc. (McKinsey), a global management consulting firm; and Robert Moffat, Senior Vice President and Group Executive at International Business Machines Corporation (IBM).

All are charged with participating in insider trading schemes that together netted more than $20 million in illegal profits. This case represents the first time that court-authorized wiretaps have been used to target significant insider trading on Wall Sreet.

According to the two complaints unsealed today in Manhattan federal court:

Rajaratnam, Kurland, Chiesi, and others repeatedly traded on material, nonpublic information given as tips by insiders and others at hedge funds, public companies, and investor relations firms — including Intel, IBM, McKinsey, Moody’s Investors Services Inc. (Moody’s), Market Street Partners, Akamai Technologies, Inc. (Akamai) and Polycom, Inc. (Polycom). As a result of their insider trading, Rajaratnam, Chiesi, Kurland and others earned millions of dollars of illegal profits for themselves and the hedge funds with which they were affiliated. One of the insiders, Kumar, profited from investments in Galleon. Goel, also an insider, received profitable trades in a personal account managed by Rajaratnam.

Telephone conversations between Rajaratnam and Chiesi, intercepted based on court-authorized wiretaps of phones, as well as consensually recorded conversations with an individual who subsequently became a cooperating government witness (the CW), revealed that Rajaratnam, Kurland, Chiesi and the CW routinely received inside information directly or indirectly from insiders and provided it to each other for the purpose of trading based on the information. The material, nonpublic information pertained to upcoming earnings forecasts, mergers, acquisitions, or other business combinations (the Inside Information).

This case is being supervised by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Josh Klein and Jonathan Streeter and Special Assistant U.S. Attorney Andrew Michaelson are in charge of the prosecutions.

CHARGES

The charges contained in the complaints are merely accusations, and the defendants are presumed innocent unless and until proven guilty.

United States vs. Raj Rajaratnam, et al. (09 Mag. 2306)

COUNT CHARGE DEFENDANT MAXIMUM POTENTIAL PENALTIES

1. Conspiracy to Commit Securities Fraud RAJ RAJARATNAM 5 years; $250,000 or twice the gross gain or loss

2. Conspiracy to Commit Securities Fraud RAJ RAJARATNAM

RAJIV GOEL 5 years; $250,000 or twice the gross gain or loss

3. Conspiracy to Commit Securities Fraud RAJ RAJARATNAM 5 years; $250,000 or twice the gross gain or loss

4. Conspiracy to Commit Securities Fraud RAJ RAJARATNAM

ANIL KUMAR 5 years; $250,000 or twice the gross gain or loss

5.Securities Fraud RAJ RAJARATNAMRAJIV GOEL 20 years; $5 million or twice the gross gain or loss

6. Securities Fraud RAJ RAJARATNAM, RAJIV GOEL 20 years; $5 million or twice the gross gain or loss

7. Securities Fraud RAJ RAJARATNAM 20 years; $5 million or twice the gross gain or loss

8. Securities Fraud RAJ RAJARATNAM 20 years; $5 million or twice the gross gain or loss

9. Securities Fraud RAJ RAJARATNAM 20 years; $5 million or twice the gross gain or loss

10. Securities Fraud RAJ RAJARATNAM ANIL KUMAR 20 years; $5 million or twice the gross gain or loss

11. Securities Fraud RAJ RAJARATNAMANIL KUMAR 20 years; $5 million or twice the gross gain or loss

12. Securities Fraud RAJ RAJARATNAMANIL KUMAR 20 years; $5 million or twice the gross gain or loss

13. Securities Fraud RAJ RAJARATNAM 20 years; $5 million or twice the gross gain or loss

United States v. Danielle Chiesi, et al. (09 Mag. 2307)

COUNT CHARGE DEFENDANT MAXIMUM POTENTIAL PENALTIES

1. Conspiracy to Commit Securities Fraud DANIELLE CHIESI

MARK KURLAND 5 years; $250,000 or twice the gross gain or loss

2. Conspiracy to Commit Securities Fraud DANIELLE CHIESI

ROBERT MOFFAT 5 years; $250,000 or twice the gross gain or loss

3. Conspiracy to Commit Securities Fraud DANIELLE CHIESI 5 years; $250,000 or twice the gross gain or loss.

4. Securities Fraud DANIELLE CHIESI 20 years; $5 million or twice the gross gain or loss .

5. Securities Fraud DANIELLE CHIESI 20 years; $5 million or twice the gross gain or loss .

6. Securities Fraud DANIELLE CHIESI 20 years; $5 million or twice the gross gain or loss.

SOUTH ASIAN

Whether by accident or design there prevails an interesting South Asian dimension to the case. Three of those charged (Rajaratnam, Goel & Kumar) are of  South Asian origin. So too is govt attorney Preet Bharara. Some sources of inside information for the accused are also of South Asian origin. The chief witness for the prosecution described as “Tipper A’ has also been identified as Roomy Khan a woman of Bangla Deshi origin.

The charges against Rajaratnam  relate to  eight instances of trade undertaken by him  where he allegedly profited illegally on the basis of non – public information procured through dubious means.  A brief summary of the “trades” is as follows -

1.Polycom

On Jan. 10, 2006, the unnamed source identified in the  complaint as “Tipper A” told Galleon’s Rajaratnam that, based on information received from a Polycom insider, revenues at the video-conferencing company for the fourth-quarter of 2005 were about to beat Wall Street estimates. Polycom was set to announce its earnings more than two weeks later.

Rajaratnam sent an instant message to his trader instructing him to “buy 60 [thousand shares] PLCM” for certain Galleon Tech funds. All told, from Jan. 10 through Jan. 25, the date of the Polycom earnings release, Rajaratnam and Galleon bought 245,000 shares of Polycom and 500 Polycom call-option contracts. Polycom did beat the Street, and collectively, the Galleon Tech funds made over $570,000 in connection with their Polycom trades based on Tipper A’s tip.

The same scenario was repeated for Polycom’s first-quarter 2006 earnings, the complaint says. Galleon made $165,000 on the information. Tipper A made $22,000.

2.The Hilton

Tipper A allegedly obtained confidential information in advance of a July 3, 2007, announcement that a private equity group would be buying Hilton for $47.50 per share, a premium of $11.45 over the July 3 closing price. Tipper A obtained the information from an analyst who, at the time, was working at Moody’s, a rating agency that was evaluating Hilton’s debt in connection with the planned buyout. Tipper A bought call option contracts based on the information, and passed on the tip to Rajaratnam.

On July 3, Rajaratnam and Galleon bought 400,000 shares of Hilton in the Galleon Tech funds. That evening, the Hilton transaction was announced. Tipper A sold all of the Hilton call option contracts for a profit of more than $630,000, the complaint says. To compensate the source for the Hilton tip, Tipper A paid the source $10,000. The Galleon Tech funds sold their Hilton shares after the July 3 announcement for a profit of more than $4 million.

3.Google

Around July 10, 2007, a PR consultant to Google allegedly told Tipper A that Google’s second-quarter earnings per share would be down about 25 cents. The Street had estimated yet another strong quarter for the search giant, which was scheduled to report earnings July 19.

Two days later Tipper A bought put options in Google and passed along details of the pending Google miss to Rajaratnam. He and Galleon began buying Google put options for the Galleon Tech funds, and continued buying them through July 19. In addition, Galleon funds bought other options betting on a fall in Google shares and sold short Google stock beginning July 17.

On July 19, Google announced its earnings results, disclosing that its earnings-per-share was indeed 25 cents lower than the prior quarter. Google’s share price fell from over $548 per share to almost $520 per share. The Galleon Tech funds’ profits from the Google tip were almost $8 million. Tipper A sold all of the put options the day after the July 19 announcement for a profit of over $500,000.

4. Intel

Rajaratnam allegedly tapped  Intel executive Rajiv Goel just before Intel’s (INTL) scheduled fourth-quarter 2006 earnings announcement to get inside information on the world’s largest chipmaker. On Jan. 8, 2007, Rajaratnam contacted Intel’s Goel. The next day, Rajaratnam bought 1 million shares of Intel at $21.08 per share. On Jan, 11, he bought 500,000 more at $21.65 per share.Goel and Rajaratnam communicated again multiple times over the Martin Luther King Day weekend that followed. On Tuesday, Jan. 16, the day the markets reopened, Rajaratnam reversed course, selling the Galleon Tech funds’ entire 1.5 million share long position in Intel at $22.03 per share, and making a profit of a little over $1 millionLater that day, after the markets closed, Intel released its fourth-quarter 2006 earnings.

Although the company’s earnings beat analysts’ projections, its guidance was below expectations. Intel’s stock price fell nearly 5% on the news, but Rajaratnam was already out of the stock.According to Intel officials, Goel has been placed on administrative leave pending the court case.

5.Clearwire

In early February 2008, Goel allegedly tipped Rajaratnam that there was a pending joint venture between wireless broadband company Clearwire and Sprint (S). Intel was a huge shareholder in Clearwire. Over the next three months, Galleon Tech funds bought and sold Clearwire shares on three occasions. Each time, the Galleon Tech funds traded in advance of news reports relating to the deal between Clearwire and Sprint, and shortly after calls between Goel and Rajaratnam.

Overall, the Galleon Tech funds realized gains of about $780,000 on their Clearwire trading between February and May 2008. On May 8, the joint venture between Sprint and Clearwire was publicly announced.As payback for Goel’s tips, Rajaratnam (or someone acting on his behalf) allegedly executed trades in Goel’s personal brokerage account based on inside information concerning Hilton and PeopleSupport (the government notes that a Galleon director sits on the PeopleSupport’s board of directors though no charges of wrongdoing have been brought against that person), which resulted in nearly $250,000 in profits for Goel.

6.Akamai

Another hedge fund executive, New Castle’s Danielle Chiesi, is an acquaintance of Rajaratnam. When an Akamai executive told her that the Internet infrastructure company would trend lower in the company’s second-quarter 2008 guidance to investors, the government claims she passed along the information to Rajaratnam. The consensus among Akamai’s management was that Akamai’s stock price would decline in the wake of the lowered guidance scheduled for July 30.

Chiesi and the Akamai source spoke multiple times between July 2 and July 24. Chiesi told what she had learned from the Akamai source to her colleague at New Castle, Mark Kurland. On July 25, several New Castle funds took short positions in Akamai shares. The positions grew through July 30. Rajaratnam’s Galleon funds also built up a short position during the same period.

In its second-quarter 2008 earnings announcement on July 30, Akamai’s results disappointed investors. The stock fell nearly 20% following the announcement. New Castle made $2.4 million. The Galleon Tech funds took home more than $3.2 million.

7.IBM – Sun

In January 2009, IBM was conducting due diligence on Sun Microsystems in preparation for an offer to buy it (Sun was ultimately bought by Oracle (ORCL). As part of that process, Sun opened its books to IBM, providing its second-quarter 2009 results in advance of the scheduled Jan. 27 announcement.

Because much of Sun’s business is hardware, IBM’s top hardware executive Robert Moffat was involved in the evaluation of Sun. Moffat allegedly had access to Sun’s earnings results. He and Chiesi were also friends and contacted each other repeatedly during January 2009. The frequency of contact between the two increased just prior to the Sun earnings release, investigators say.

On Jan. 26, New Castle began acquiring a substantial long position in Sun. On Jan. 27, after the market close, Sun reported earnings that exceeded Wall Street’s estimates, posting a two-cent per-share profit when analysts had expected a loss. Sun shares soared 21% on the news. New Castle made almost $1 million.

8. A.M.Devices

On June 1, 2008, McKinsey & Co. began advising Advanced Micro Devices (AMD)over its negotiations with two Abu Dhabi sovereign entities. One, a joint venture with the Abu Dhabi government, Advanced Technology Investment Co., would take over AMD’s chip manufacturing. The other, an Abu Dhabi sovereign wealth fund, Mubadala Investment Co., would provide a large investment in AMD (in the end, it would total $314 million). According to the SEC, Anil Kumar was one of the McKinsey team briefed on the negotiations. Kumar also knew Rajaratnam.

On Aug. 14, Kumar learned that the two deals were finally getting done. The next day he told Rajaratnam, investigators say. Almost immediately, Rajaratnam and Galleon increased their long position in AMD by buying more than 2.5 million shares in Galleon funds and continuing to build their long position until just before the announcement of the AMD transactions. Rajaratnam and Galleon bought 4 million AMD shares on Sept. 25 and 26, and 1.65 million more on Oct. 3. On Oct. 8, the deals were announced publicly. AMD’s stock price increased by about 25%. All told, the value of Galleon’s entire position in AMD increased approximately $9.5 million in Oct. 6-7.

However, the allegedly  gained profits via inside trading  was wiped out by the financial crisis of the time. Because the Galleon Tech funds had accumulated much of their AMD position beginning in August, before the crisis sent stock prices, including AMD’s, tumbling in September and October, the funds lost about $30 million on the overall trade.

LAWYERS

As stated earlier Rajaratnam intended fighting the charges against him and clearing himself. This  of course meant  that the best legal services available had to be obtained.

Earlier the law firm Gibson, Dunn & Crutcher had  represented him with James Walden as  chief defence counsel. But Rajaratnam kept his options open and scouted around for additional legal representation.

After discussions with firms like Kasowitz,Benson,Torres & Friedman and Paul,Weiss,Rifkind,Wharton & Garrison , Rajaratnam opted for Akin, Gump, Strauss, Hauer & Feld to represent himself.

The Galleon management company was represented by Shearman & Sterling while legal advice to employees was provided by  Boies,Schiller & Flexner.

JOHN R. DOWD

Rajaratnam’s new defence lawyer after the change was John R Dowd.He is a partner of the law firm in the Washington DC office.

It was Dowd who represented the Republican presidential candidate Senator John Mccain in 1990 – 91 during  the Senate Ethics Investigations known as the “Keating 5”.Mccain received the mildest punishment then and credit for that went to Dowd.

John R Dowd also represented  former Arizona governor Fife Symington when tried on charges of extortion. Dowd is also representing high profile Monica M Goodling in her fifth amendment challenge to speaking before Congress regarding the firing of nine US attorneys.

Apparently Rajaratnam’s decision to change lawyers did not miff his previous counsel. His earlier counsel James Walden issued a statement welcoming the change -

“Raj has retained John Dowd of the Washington, D.C.-based firm Akin Gump to represent him going forward, and we are pleased Raj will continue to get great legal representation from such a fine group of lawyers. Rest assured, his team will not miss a beat and is already well prepared to help him fight these charges and clear his name”.Walden said.

LETTER

On Thursday Oct 29th Rajaratnam’s new counsel John  R Dodd fired his opening shot. He filed a letter in court on Rajaratnam’s behalf seeking reduction of his  bail to $25 million from $100 million  and allow him to travel within the continental United States.

According to news reports Lawyers for  Rajaratnam argued that his  flight risk is minimal because of his deep financial and family ties to New York City, as well as his eagerness to fight the government’s charges against him. They emphasized  that nearly all of Mr. Rajaratnam’s family lives in the United States, including his three children, his parents, his wife of 21 years and his two brothers and two sisters.

In addition to family connections, lawyers argued that Mr. Rajaratnam was highly unlikely to abandon his considerable real estate holdings, including a $17.5 million apartment in Manhattan, a $10.5 million house in Connecticut and a $1.4 million Florida condominium.

Lawyers  also argued the government relied on “incomplete information to suggest that Mr. Rajaratnam intended to flee the United States on the morning of his arrest.”

Mr. Rajaratnam’s lawyers also took their first swipe  against the government’s case, saying it relied heavily on a single cooperating witness, Roomy Kahn, who is not only a convicted felon but also found to have fabricated evidence in another case last August.

GALLEON

“The  lawyers noted the government did not subpoena Galleon’s trading records until 10 days after the arrest, which supports some experts’ suggestions that the government was rushed to make the arrests.

The lawyers also requested  that Mr. Rajaratnam’s travel restrictions, currently at 110 miles from New York City, be extended to include the entire continental United States so he can, among other things, entertain offers to buy Galleon.

According to news reports Rajaratnam’s lead lawyer, John Dowd, said his client was being treated worse than epic swindler Bernard Madoff, who was released on $10 million bail last December after his initial confession to a multibillion-dollar fraud.”The idea that Mr Rajaratnam would simply abandon his  properties in the US to avoid a trial that he is confident of winning is neither realistic nor credible,” Dowd,  said in a letter to Magistrate Judge Frank Maas.

The letter described Rajaratnam as “intensely focused” on Galleon business and “has no intention of abandoning Galleon and its employees.” It said that after his arrest, Rajaratnam ordered document preservation at Galleon and “that all shredders be removed from the office.”

“The case is at its earliest stages, and the Government does not yet have the critical information that will place its current allegations in the proper context and dispel any allegation of criminal conduct,” Dowd and lawyers at law firm Akin Gump said in the letter.

The ball now is in the court of the court. A hearing is likely to be scheduled to decide on relaxation of bail condition requests.

This however is only the preliminary. A long  legal battle lies ahead for Raj Rajaratnam. It appears that  the tough Tamil tycoon is gearing up to face it defiantly.

D.B.S.Jeyaraj can be reached at djeyaraj2005@yahoo.com