Every week­day at 8:35 am, Galleon Group's 70 an­a­lysts, port­fo­lio man­agers and traders pack in­to a con­fer­ence room on the 34th floor of the IBM Build­ing, a gray-green pol­ished gran­ite sky­scraper on New York's Madi­son Av­enue. Tardy ar­rivals are fined US$25. At the head of the ta­ble, chief ex­ec­u­tive of­fi­cer Raj Ra­jarat­nam fires off ques­tions to the staff of his US$3.7 bil­lion hedge-fund firm: which com­pa­nies' mar­gins are peak­ing? What would change your mind about this stock? What's the risk of that com­pa­ny fail­ing to win an ex­pect­ed con­tract? The 52-year-old bil­lion­aire ex­pects his an­a­lysts to have an edge: bet­ter in­for­ma­tion than any­one else, say peo­ple who have at­tend­ed the meet­ings. US pros­e­cu­tors al­lege that Ra­jarat­nam's own edge was il­le­gal.

He was ar­rest­ed on Oc­to­ber 16 at his home on Man­hat­tan's Sut­ton Place, charged with us­ing in­side in­for­ma­tion to trade shares in­clud­ing Google Inc, Poly­com Inc, Hilton Ho­tels Cor­po­ra­tion and Ad­vanced Mi­cro De­vices Inc, ac­cord­ing to com­plaints. Five oth­er de­fen­dants al­so were ar­rest­ed in New York and Cal­i­for­nia in a US$20 mil­lion scheme that pros­e­cu­tors say is the largest-ever in­sid­er trad­ing case in­volv­ing hedge funds. "Every trad­er wants an edge, and there are many gray ar­eas when it comes to ag­gres­sive re­search," said Ron Geffn­er, a lawyer at New York-based Sadis & Gold­berg, whose clients in­clude hedge funds. "But if you trade on ma­te­r­i­al, non-pub­lic in­for­ma­tion that comes from a com­pa­ny in­sid­er who is breach­ing his fidu­cia­ry du­ty, odds are that it is il­le­gal."

559th rich­est per­son

Ra­jarat­nam's net worth of US$1.3 bil­lion makes him the 559th rich­est per­son in the world, ac­cord­ing to Forbes Mag­a­zine, on par with the likes of hedge fund man­ag­er Ju­lian Robert­son and in­vestor Wilbur Ross. Ra­jarat­nam has in­vest­ed in at least two New York City restau­rants. Galleon was among the 10 largest hedge funds in the world in the ear­ly years of this decade, and it man­aged US$7 bil­lion at its peak in 2008. It al­so was one of the three largest tech­nol­o­gy hedge funds along with Lawrence Bow­man's Bow­man Tech­nol­o­gy Fund, which closed in 2001, and Daniel Ben­ton's An­dor Cap­i­tal Man­age­ment, which shut down last year. Galleon's US$1.2 bil­lion di­ver­si­fied fund has climbed 21.5 per cent a year, on av­er­age, since 1992, ac­cord­ing to a Sep­tem­ber mar­ket­ing doc­u­ment from the firm, com­pared with 7.6 per cent for the Stan­dard & Poor's 500 In­dex of the largest US com­pa­nies. The fund has re­turned 22.3 per cent this year, ac­cord­ing to an in­vestor let­ter.

Char­i­ta­ble giv­ing

As Ra­jarat­nam's wealth grew, he and his wife Asha Pabla, who have three chil­dren, cre­at­ed a fam­i­ly foun­da­tion and have giv­en mon­ey to fight AIDS in In­dia. They do­nat­ed US$5 mil­lion to help the 2004 tsuna­mi vic­tims in his home coun­try of Sri Lan­ka, where Ra­jarat­nam was on va­ca­tion with his fam­i­ly when the dis­as­ter struck. The foun­da­tion do­nat­ed US$400,000 in 2005 to the Tamils Re­ha­bil­i­ta­tion Or­gan­i­sa­tion in Cum­ber­land, Mary­land, ac­cord­ing to tax forms filed by the foun­da­tion with the In­ter­nal Rev­enue Ser­vice. Two years lat­er, the US Trea­sury De­part­ment froze the as­sets of the char­i­ty, say­ing it was a front for the Lib­er­a­tion Tigers of Tamil Ee­lam, which the State De­part­ment had des­ig­nat­ed as a ter­ror­ist group 10 years ear­li­er. "His do­na­tion was re­spon­si­ble for re­build­ing thou­sands of homes for Tamils, Sin­halese, and Mus­lims with­out dis­crim­i­na­tion," Dan Gag­nier, a spokesman for Galleon, said in an e-mailed state­ment. Sri Lan­ka au­thor­i­ties will re­view "sig­nif­i­cant" trans­ac­tions car­ried out by Ra­jarat­nam, Chan­na De Sil­va, di­rec­tor gen­er­al of the Se­cu­ri­ties and Ex­change Com­mis­sion of Sri Lan­ka, said in an in­ter­view to­day. The agency will "col­lab­o­rate" with for­eign gov­ern­ments in their in­ves­ti­ga­tions.

High-tech com­pa­nies

His first job af­ter grad­u­a­tion was at Chase Man­hat­tan Bank, where he was a lend­ing of­fi­cer in the group that made loans to high-tech com­pa­nies. In 1985, he joined Need­ham & Com­pa­ny, a New York-based in­vest­ment bank that spe­cialised in tech­nol­o­gy and health­care com­pa­nies. He start­ed as an an­a­lyst cov­er­ing the elec­tron­ics in­dus­try and rose through the ranks, be­com­ing head of re­search in 1987, chief op­er­at­ing of­fi­cer in 1989 and pres­i­dent in 1991. A year lat­er, at 34, Ra­jarat­nam start­ed a fund, Need­ham Emerg­ing Growth Part­ners LP, ac­cord­ing to Galleon's mar­ket­ing doc­u­ments. Ra­jarat­nam and Need­ham col­leagues Kr­ishen Sud, Gary Rosen­bach and Ari Ar­javalingam formed Galleon Group in Jan­u­ary 1997. By the end of that year, they were man­ag­ing US$830 mil­lion, much of it from tech­nol­o­gy com­pa­ny ex­ec­u­tives Ra­jarat­nam had got­ten to know through­out his ca­reer.

Split­ting up

As the In­ter­net bub­ble burst in 2000, the Galleon Di­ver­si­fied Fund climbed 43.7 per cent in the three-year pe­ri­od through 2002, while the S&P 500 dropped 37.6 per cent. Galleon's as­sets jumped to US$5 bil­lion by 2001, mak­ing it one of the 10 biggest hedge funds in the world. That year Sud, who was co-head of the firm's health­care fund and who had been friends with Ra­jarat­nam since the two were class­mates at Whar­ton two decades be­fore, left to start his own firm, tak­ing six em­ploy­ees with him. Ra­jarat­nam 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, As­sis­tant US At­tor­ney Josh Klein said in court on Oc­to­ber 16. Pros­e­cu­tors al­so charged Ra­jiv Goel, who worked at In­tel Cap­i­tal as a di­rec­tor in strate­gic in­vest­ments, Anil Ku­mar, who worked as a di­rec­tor at McK­in­sey & Com­pa­ny, In­ter­na­tion­al Busi­ness Ma­chines Cor­po­ra­tion ex­ec­u­tive Robert Mof­fat, and for­mer of­fi­cials at Bear Stearns As­set Man­age­ment Danielle Chiesi and Mark Kur­land, who were af­fil­i­at­ed with the firm's US$1 bil­lion New Cas­tle Part­ners.

Tem­po­rary leave

Mof­fat ran one of five ma­jor busi­ness­es at IBM, the world's largest com­put­er-ser­vices provider, and re­port­ed to chief ex­ec­u­tive of­fi­cer Sam Palmisano. The Ar­monk, New York-based com­pa­ny placed Mof­fat on tem­po­rary leave and Rod­ney Ad­kins was put in charge of his group on an act­ing ba­sis, Ed­ward Barbi­ni, an IBM spokesman, said to­day. Yolande Daen­inck, a spokes­woman for McK­in­sey, said the firm is "dis­tressed" by Ku­mar's ar­rest. Chuck Mul­loy, an In­tel spokesman, said the com­pa­ny is in­ves­ti­gat­ing and has put Goel on leave. At the hear­ing, US Mag­is­trate Judge Dou­glas Eaton in Man­hat­tan set Ra­jarat­nam's bail at US$100 mil­lion, to be se­cured by US$20 mil­lion in as­sets and guar­an­teed by his wife and four oth­ers. Ra­jarat­nam, who gave up his pass­port, may not trav­el more than 110 miles from New York City.

US$100 mil­lion bail

Klein asked Eaton to hold Ra­jarat­nam in jail pend­ing his tri­al. He said the hedge-fund man­ag­er had "enor­mous in­cen­tive" to flee to his na­tive Sri Lan­ka or else­where. The pros­e­cu­tor said there's ad­di­tion­al ev­i­dence, there may be more charges against Ra­jarat­nam and that the ev­i­dence is "over­whelm­ing." 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. Pros­e­cu­tors say Ra­jarat­nam trad­ed on leaks from in­sid­ers at Poly­com, Moody's In­vestors Ser­vice Inc and Mar­ket Street Part­ners. In an­oth­er al­leged scheme, Chiesi got tips from an uniden­ti­fied per­son at Aka­mai Tech­nolo­gies Inc and from Mof­fat, ac­cord­ing to one of the crim­i­nal com­plaints. These tips gen­er­at­ed oth­ers, pros­e­cu­tors said, as Chiesi passed them on­to to Ra­jarat­nam who, in turn, gave Chiesi in­side in­for­ma­tion. The gov­ern­ment's com­plaint quotes con­ver­sa­tions be­tween Chiesi and Ra­jarat­nam, in­clud­ing a Ju­ly 24, 2008, dis­cus­sion that they al­leged­ly had af­ter she spoke to the per­son at Aka­mai. That day, Aka­mai stock had closed at US$32.18.

No key-man clause

Galleon said in an Oc­to­ber 16 state­ment af­ter Ra­jarat­nam's ar­rest that the firm "con­tin­ues to op­er­ate and is high­ly liq­uid." While there is no key-man clause that would al­low in­vestors to pull out based on Ra­jarat­nam's ar­rest, in­vestors in the Di­ver­si­fied and Buc­ca­neer's Fund can with­draw their mon­ey on a quar­ter­ly ba­sis with 45 days' no­tice, ac­cord­ing to mar­ket­ing doc­u­ments. Re­tain­ing top man­agers and hold­ing on to clients may prove chal­leng­ing in light of the in­ves­ti­ga­tion, said Craig Lil­ly, a Pa­lo Al­to, Cal­i­for­nia-based at­tor­ney at Squire, Sanders & Dempsey, whose clients in­clude hedge funds. "This may spell the end of the firm," Lil­ly said. "They will prob­a­bly face a tremen­dous wave of re­demp­tions as well as brain-drain as se­nior peo­ple head for the ex­it door." (Bloomberg)

About Raj Ra­jarat­nam

Born in Sri Lan­ka's cap­i­tal, Colom­bo, Raj Ra­jarat­nam was ed­u­cat­ed there at St Thomas' Prepara­to­ry School be­fore leav­ing for Eng­land, where he stud­ied en­gi­neer­ing at the Uni­ver­si­ty of Sus­sex. He came to the US to get his mas­ter's of busi­ness ad­min­is­tra­tion, grad­u­at­ing from the Uni­ver­si­ty of Penn­syl­va­nia's Whar­ton School in 1983. His first job af­ter grad­u­a­tion was at Chase Man­hat­tan Bank, where he was a lend­ing of­fi­cer in the group that made loans to high-tech com­pa­nies.