Updated on October 21 at 7:25 p.m. PDT: correcting, at bottom, for what the U.S. Attorney's office describes as "CC-1."
Think of it as a twist on the old rivalry between chip giants Intel and Advanced Micro Devices. But this time, the rivalry is about which company can make a hedge fund more money.
The complaint filed by the government against six people on Friday details how a relatively obscure Intel treasury executive and a prominent hedge fund manager allegedly participated in an insider-trading ring centered on an Intel investment. The document also shows alleged insider trading of AMD shares by an adviser from McKinsey & Company before the chipmaker spun off of its manufacturing operations.
The case revolves around Raj Rajaratnam, who founded the Galleon Group, a New York-based hedge fund that manages $7 billion in funds. Federal prosecutors charged Rajaratnam and five others on Friday with securities fraud, alleging they were involved in insider trading of some of the most well-known tech companies including Intel, Google, AMD, and IBM.
Jim Walden, a lawyer for Rajaratnam, said Friday, "My client is innocent and we are going to fight the charges," according to The New York Times.
Rajaratnam, a native of Sri Lanka, got his start as a semiconductor analyst at investment-banking firm Needham & Co. and parlayed this into the Galleon Group, where he had a reputation for particularly aggressive information-gathering tactics.
And one of his contacts was Rajiv Goel, a managing director of strategic investments for Intel's treasury group and one of the six defendants.
Goel is not well known inside--or outside--of Intel. In fact, he is an Intel executive apparently so obscure that CEO Paul Otellini said in a television interview Monday that he'd never even heard of him--yet somebody who has dragged the chipmaker into the biggest insider-trading scandal to hit Silicon Valley in years. When asked about the case in an interview with Fox Business News Monday, Otellini said his first reaction was, "'Who's Rajiv Goel'--I'd never heard of this guy," the CEO said, according to a Fox transcript. "He's a fairly low-level guy." Otellini added: "People are people. I don't want to judge him. He hasn't been arrested. I think he's only been charged. If this is true, he's out."
Goel was, in fact, arrested on Friday in San Jose, Calif. according to statement from the U.S. Attorney's office. An Intel representative said that Goel has been "placed on administrative leave as we look into this matter." Intel said it was never contacted by authorities regarding the investigation.
Goel appeared briefly before U.S. Magistrate Judge Patricia Trumbull in San Jose, according to the San Jose Mercury News. As of Monday morning, Manuel Araujo, Goel's federal public defender during his court appearance, could not be reached for comment. Neither Araujo nor Goel's wife, who signed papers as part of posting his bail, would comment, according to the San Jose Mercury News.
The complaint alleges that beginning in "at least" March 2008 and running through through October 2008, Rajaratnam and Goel "participated in a scheme to defraud by disclosing inside information and/or executing securities transactions based on Inside Information" related to Clearwire.
The complaint, filed by the U.S. Attorney for New York's Southern District, details how Rajaratnam and Goel allegedly conducted the scheme. "Goel obtained inside information regarding investments made by his employer, Intel Capital, including an investment made by Intel Capital in Clearwire in or about the spring of 2008. And Goel provided this inside information to Rajaratnam," the complaint said.
On March 24, 2008, Rajaratnam and Galleon purchased 125,800 shares of Clearwire stock at prices ranging from $10.95 to $11.74 per share, according to the complaint. On March 25, Rajaratnam and Galleon purchased another 136,000 shares at $12.04 per share, among other purchases.
Rajaratnam allegedly executed securities transactions on the basis of this inside information from Goel, resulting in a profit of approximately $579,000. "In exchange, Rajaratnam placed profitable trades for the benefit of Goel in a personal brokerage account maintained by Goel at Charles Schwab," the complaint states.
Numerous cell phone conversations are cited in the complaint between Rajaratnam and Goel, including one in which they speculated on the future price of Clearwire's stock and another in which they discussed the likelihood that Clearwire would receive an additional capital infusion from Intel.
Goel also asked Rajaratnam to get him a job with "one of your powerful friends," adding that he was "tired" of working at Intel, according to the complaint.
In July 2006, Intel Capital announced that it had made the largest investment "in its history" in Clearwire. At that time, Intel stated that the investment was made "to hasten the proliferation of mobile WiMAX in PC clients" and that Intel would "work to enable the inclusion of WiMAX chipsets in next generation mobile computing platforms." Earlier this year, however, Intel said that its investment in Clearwire would result in a noncash charge of about $950 million.
Trading in the securities of AMD
Intel's rival, AMD, was also prominent in the complaint, which alleges that Anil Kumar, who was employed by McKinsey & Company as a director, engaged in insider-trading activity with Rajaratnam when AMD was trying to spin off its manufacturing operations last year--which eventually became a multibillion-dollar deal. Kumar worked on the AMD reorganization on behalf of McKinsey, which was retained by AMD to provide consulting services for the reorganization.
Kumar is being represented by attorney Charles E. Clayman, of law firm Clayman and Rosenberg, who issued this statement: "Anil Kumar is as shocked as everyone else who knows him to see his name in this complaint. He is a man of integrity and honesty. He emphatically denies these charges. He has faith in the Department of Justice and his lawyers. He knows the truth will prevail and these allegations will be dismissed."
On August 15, 2008, before the deal was closed to spin off AMD's manufacturing operations, the complaint alleges that Kumar called Rajaratnam and said that relevant parties had "shaken hands and said they're going ahead with the deal." Kumar then said: "I think you can just buy (AMD stock)."
Kumar also told Rajaratnam that the AMD spin-off announcement would not take place "until the week after Labor Day." Rajaratnam and Kumar then agreed that Rajaratnam would buy 1 million shares of AMD stock, according to the complaint.
Rajaratnam and Galleon proceeded to buy millions of AMD shares. For example, Rajaratnam and Galleon purchased 2.1 million shares of AMD stock on August 15, 2008, at $5.55 per share. And on August 18, Rajaratnam and Galleon purchased 2.8 million additional shares of AMD stock at $5.75 per share, among other purchases.
The deal was ultimately announced on October 6 when a significant investment was secured from Advanced Technology Investment Co. and Abu Dhabi-based Mubadala Development Co. At that time, AMD said the new company had secured about $5.7 billion of "confirmed, pledged investment," with some of the money earmarked for a future manufacturing facility in Malta, N.Y.
Though AMD's stock price rose briefly--about 25 percent--the price then dropped precipitously because of the financial crisis on Wall Street. AMD's stock price fell from $7 in June 2008 to $2.10 on December 8.
Rajaratnam engaged in overlapping schemes with various defendants including Kumar, Goel, and New Castle funds employee Danielle Chiesi (identified as "CC-1") who told Rajaratnam that s/he "had spoken with an executive at AMD." CC-1 said that the AMD executive described the deal to spin off manufacturing operations as "unbelievable," according to the complaint. (See Note below.)
Alan Kaufman of Kelley Drye & Warren is representing Danielle Chiesi. When contacted by phone, Kaufman said he had no comment. An AMD representative said the company is reviewing the matter and had no comment about the AMD executive cited by Chiesi.
Note: The U.S. Attorney's complaint states this about CC-1: "Rajaratnam engaged in overlapping schemes with the CW (government cooperating witness), Kumar, Goel, and Chiesi (identified in the Rajaratnam Complaint as 'CC-1') to trade on the basis of Inside Information in several publicly traded companies. Specifically, these individuals engaged in insider trading in Polycom, Hilton Hotels Corp. (Hilton), Google Inc. (Google), Clearwire Corporation (Clearwire), Akamai, Advanced Micro Devices (AMD), and People Support, Inc. (People Support)."