A top US watchdog has warned financial firms they face increased scrutiny after a billionaire appeared in court on Friday charged with one of biggest hedge fund insider trading case in US history.
Amid widespread public anger at Wall Street transgressions, the Securities and Exchange Commission said the indictment of hedge fund big-wig Raj Rajaratnam should be seen as a warning.
“It would be wise for investment advisors and corporate executives to closely look at today’s case, their own internal operations, and the increasing focus and scrutiny on hedge fund trading by the SEC and others,” said Robert Khuzami, director of the SEC’s enforcement division.
Khuzami said hedge funds should “consider what lessons can be learned and applied to their own operations” after he announced charges against Rajaratnam and his New York-based hedge fund advisory firm Galleon Management LP.
At a press conference Friday, Khuzami described Rajaratnam’s indictment as “the biggest hedge fund insider trading case ever brought.”
The SEC complaint alleges the illegal trading scheme netted some 25 million dollars.
“He is not a master of the universe. Instead, Raj Rajaratnam is a master of the rolodex,” Khuzami said.
“Rajaratnam embarked on a deliberate and systematic use of inside information to inform his trading decisions.”
Also named in the SEC complaint are Galleon, and a second hedge fund — New Castle Funds LLC — along with five individuals.
Rajaratnam’s co-accused, who include employees of Intel subsidiary Intel Capital, IBM, and McKinsey & Company, are alleged to have supplied him with the insider information he used to trade on behalf of Galleon.
The information Rajaratnam allegedly received involved a number of well-known companies, including Google, IBM and Hilton.
Much of the case against Rajaratnam and his co-accused is based on wiretaps that allegedly recorded conversations about insider information and the possible consequences of being caught.
One excerpt cited in the criminal complaint against co-defendant Danielle Chiesi, a portfolio manager at New Castle Funds, involves an executive with Akamai, an Internet content delivery company.
“I’m gonna give you a present. But it has to be face-to-face…” the executive says. When Chiesi asks what the “present” is, the executive says: “Information.”
“Well that, that is a great present,” Chiesi says.
Another part of the complaint involves a phonecall between Chiesi and co-defendant Mark Kurland, a senior managing director and general partner at New Castle, who warns “Don’t put anything on email… Don’t even email Raj (Rajaratnam), or anybody… Be careful.”
Elsewhere, Chiesi appears aware of the potential consequences of the scheme, telling a unnamed individual: “I’m dead if this leaks. I really am…”
Rajaratnam, who was named number 559 on this year’s Forbes list of world billionaires, and his co-defendants are charged with various violations of the Securities Exchange Act. They could face up to 20 years in prison if convicted.