About 15 years ago, as a young reporter covering the semiconductor industry for a newswire, I met a man called Raj Rajaratnam. At that time he was not only an influential semiconductor analyst at Needham & Co., but also president of the brokerage firm. The Sri Lanka-born analyst was one of the best and he wasn’t shy about letting people know it. Rajaratnam now runs a $7 billion hedge fund called the Galleon Technology Funds.
Earlier today, he was arrested for what is allegedly an insider trading scam involving quite a few people. The charges against him include four counts of conspiracy; he’s also being charged for eight counts of securities fraud. Talk about an ignominious fall for a man who is said to be worth a billion dollars and is ranked No. 559 on Forbes’ World’s Billionaires list.
The Wall Street Journal reports:
Others charged criminally in the case include Rajiv Goel, director in strategic investments at Intel Corp.’s investment arm; Anil Kumar, a director at global management-consulting firm McKinsey & Co.; Danielle Chiesi and Mark Kurland of New Castle Partners LLC, the one-time equity hedge fund group at Bear Stearns Asset Management Inc.; and Robert Moffat, a senior vice president at International Business Machines Corp.
The allegations put Mr. Rajaratnam at the center of several insider trades in which he allegedly caused Galleon funds to act on inside information or passed along tips to others.
In one instance, prosecutors allege that Mr. Rajaratnam, between January 2006 and July 2007, received nonpublic information about Polycom Inc., Hilton Hotels Corp. and Google Inc. and caused Galleon Technology Funds to make improper trades on that information. As a result, the Galleon fund earned more than $12.7 million, prosecutors said.
When I read this news this morning on Bloomberg, my whole life flashed in front of my eyes. Rajaratnam’s rise to the top was a familiar story to anyone who was in the technology business. A graduate of the University of Pennsylvania’s Wharton School of Business, he rose to fame because of his coverage of the semiconductor industry, which at the time was on a massive upswing.
Whether it was his relationships with chip companies or something else, he became a dominant analyst for Needham and eventually brought them so much business that he became president of the firm in 1991. Remember, this was the go-go 1990s, an era when everything was OK, and he rose with the boom.
He started his own hedge fund, the Galleon Group, in 1997 and left Needham in 2001. Over the next few years, he reported spectacular returns and was the envy of the industry. Many of the analysts (such as Goldman Sachs’ Microsoft analyst Rick Sherlund) I met over my long career went to work for him. The spectacular results brought in more money. From Galleon Group web site via MarketFolly:
…..”manages a series of funds that specialize in the technology and healthcare industries. Currently The Galleon Group manages five different long/short equity funds: Technology, Healthcare, New Media (Internet), Communications and Life Sciences. Galleon’s philosophy and approach differs from that of other hedge funds in the fundamental belief that it is possible to deliver superior returns to our investors without employing leverage. Combine strong fundamental investment analysis with superior trading capability Galleon places a strong emphasis on both fundamental investment analysis and trading. This enables us to identify companies with superior long-term growth prospects while maintaining the flexibility to profit from short-term market fluctuations.”
How do I say it politely? That is all poppycock. For all that analysis was apparently nothing but smoke and mirrors, and instead seems like a case of insider information-based trading. As Bloomberg reports:
Prosecutors said they’ve 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 Federal Bureau of Investigation. The person, who has pleaded guilty and is cooperating with authorities, had used inside information to trade securities and tipped Rajaratnam since 2006, prosecutors say in one of two complaints filed in Manhattan federal court.
The person, who had sought a job at Galleon in 2005, helped prosecutors by “making consensual recordings of four telephone conversations” with Rajaratnam, the complaint says.
Given how big this fund was, I’m sure the reverberations are going to be felt in Silicon Valley, where Rajaratnam had deep relationships. I’ve been on the phone trying to find out more from my sources and will update the report as I gather more information.
Meanwhile, it reminds me of the age-old maxim: When something is too good to be true…..
24 thoughts on “The Rise & Fall of a Billionaire Technology Hedge Fund Guru”
dont they all say “dont be evil”
Yup… pretty much what you say.
don’t be evil or don’t do no evil – it’s much better with: to do good – feels good 😉
I’m more amazed that 3 South Asians got arrested by an US ATTY who is also Indian!
Learn to read between the lines, son.
No doubt that the feds didn’t want to make the bust look racial, so they scrounged around for any south Asian at the FBI to lead the news conference. The second reason for this is that they wanted to convey the following: “Hey, Indians aren’t bad.. Lookie here, we have an honest one working for us.”
They do this all the time. When they bust Italians, they always have an Italian leading the news conference. When they busted Madoff, they had a Jewish guy… and so on.
This is so transparent. They really need a new shtick.
are you kidding me? that is a very racial way of looking at this. there are more and more indians doing business in north america, so the likelihood of this corruption being traced back to places like thailand and india has grown significantly.
the FBI rarely makes the mistake of arresting the wrong people, haven’t you noticed?
Companies do this too. I have an Irish surname, so my “too big to fail bank” sends me form letters from “Sean O’Donnell”. My wife’s account with her Scandinavian maiden name gets the same letters, except from “S. Larson”.
Oh yeah, and @mesa mattress — The FBI is near the bottom in terms of arresting the right people — a little over a QUARTER of FBI cases referred for prosecution result in a conviction.
“When I read this news this morning on Bloomberg, my whole life flashed in front of my eyes. ” – your whole life flashed in front of your eyes because you read a story about a fraudulent hedge fund operator? Is that all it takes these days?
Nah…. it is a lot of memory points in life’s journey. many of them were about writing and being on Wall Street and knowing all these guys. his name reminded me of a lot people and conversations. I guess, when you get older you have higher recall of people, places and events. I am sure you don’t have to deal with all that… being young and all 🙂
Sure when you get older , you go thru old memories.
First of all thanks for the news.
Folks should understand that there is no shortcut to make so much money,
if there is one it has to be proved legal in the court of law.
Are you surprised with the revelation ?
The PR around the arrest at least seems well orchestrated, replete with photographs of terrorists that he allegedly funded. Who would have thought that Clusterstock tracked this kind of thing ?
That brilliant piece of journalism was on his Wikipedia page a while ago. 🙂
That might be why he was caught. U.S. authorities have been know to closely track terrorist financing billionaires without arresting them. In that position, smart folks play it close to their chest. Looks like Raj didn’t get that email.
What kind of stupid thinking is that? So police in Mexico should not arrest Mexicans, and cops in China should not arrest Chinese? I guess Indian policemen in Bombay only arrest white people huh?
Besides “to good to be true” there’s…
Behind all great wealth lies a crime – either morally or legally.
doesn’t everyone insider trade? isn’t that the whole game? sounds like Raj baby upset the big boys if an insider was in on the insider trades. Just sayin’
Not a very Happy Diwali for Raj!
Happy Diwali to you Om!
30 years ago we worried about people starving in India because the monsoons came too early…or too late…whatever.
Now we hear about Indians being indicted for investment fraud.
Happy Diwali, Raj. Funny that he will have to spend it in Jail. Happy diwali to you too, Om
Interesting to read the comments more than the article. Tells you about how the thinking goes for those who follow this blog.
One thing hopefully is clear to the Om Malik’s of the world, while covering folks who maybe at the top of the world as so called leaders, you have to investigate for yourself how the person has gotten to where they are.
Journalists like Om are the one’s who place many folks on the pedestal and then topple them off too when they find out something nefarious has been happening.It would be better to not hype things up.
Many a time journalists play a big role in hyping technologies and promoting companies etc and contribute to insider trading indirectly.
Maybe Om and others in his trade will think more about how they contribute to the HYPE CYCLE around things and possibly be more prescient…
Wow many top people also involved…It seems like in order to get to and stay at the top you need some luck….Or create the luck by hook or crook!!!
Om: “…my whole life flashed before me..”
So when is your 1-page autobiography coming out?
If they only found $20 million of insider trades over 2 years of wiretapping on a $7 billion fund that works out to less than .3% or .14% per year! So I would not come to the conclusion that insider trading was a big part of his returns, instead it seems to be a tiny part. Why didn’t they pursue Pequot Partners’ Art Samberg for insider trading? Instead he quietly shut down his fund. Being white and connected does help it seems . . .
Insider trading is illegal and I certainly don’t condone it – but law enforcement shouldn’t be so biased regarding who to pursue. There are tons of white male hedge fund managers –
SAC did the same thing and they were exposed earlier. But nothing ever happend to em. WSJ report that Galleon used to trade 1000s of transactions per day…that’s how they would SWEETEN the deal for brokerages in order to get inside front running type info. then the industry would call it “statistical arbitrage”. how hokey a name is that.