Federal prosecutors have charged a prominent hedge-fund manager and five others with securities fraud resulting from insider trading involving some of the tech industry's best-known companies, including Intel, Google, and IBM.
Raj Rajaratnam of Galleon Group was arrested Friday in New York according to various reports and charged with 13 counts of securities fraud and conspiracy following a FBI investigation into Galleon Group's trading patterns. Also charged in the complaint, filed in U.S. District Court for the Southern District of New York, were co-conspirators Rajiv Goel of Intel and Anil Kumar of McKinsey, which provided consulting services to AMD.
A separate complaint charges two employees of New Castle Partners, another hedge fund, with insider trading along with IBM executive Robert Moffat, senior vice president and group executive for IBM's Systems and Technology Group. Danielle Chiesi and Mark Kurland of New Castle Partners allegedly exchanged information with Rajaratnam regarding the negotiation process surrounding AMD's decision to spin off its chip-making arm and receive outside investment, and obtained other insider information for the purpose of trading in Akamai and Sun Microsystems.
Galleon Group told CNBC that it was unaware of the investigation but planned to cooperate with authorities.
An Intel representative confirmed that Goel works in the treasury department of Intel's finance organization, and has been "placed on administrative leave as we look into this matter." Intel said it was never contacted by authorities regarding the investigation.
McKinsey said in a statement that it was "distressed" about Kumar's involvement in the case and was "looking into the matter urgently. AMD said it was looking at the complaints and had no further comment. IBM declined to comment.
A representative for Akamai did not immediately return a call seeking comment.
According to the complaint, Rajaratnam obtained information about strategic investments that Intel and others were about to make in Clearwire from Goel, and details about AMD's proposed fab spinoff from Kumar and Chiesi. Galleon Group and New Castle Partners then allegedly used that information to trade in shares of Clearwire and AMD, resulting in millions of dollars in profits.
Moffat is also said to have provided details about AMD's GlobalFoundries spinoff, which required IBM's approval due to an extensive technology-sharing partnership between the two companies. In addition, Moffat allegedly gave the traders information related to upcoming earnings announcements from IBM and Sun, which IBM was considering acquiring in early 2009.
Rajaratnam also had hired an individual identified in the complaint only as a "confidential witness" who has been cooperating with the FBI since November 2007 after agreeing to plead guilty to securities fraud and conspiracy. The witness had insider contacts at Polycom and a company called Market Street, which helps publicly traded companies--such as Google--prepare earnings reports.
The FBI said Galleon Group was able to learn through its Market Street contacts that Google's second-quarter 2007 earnings results were going to miss analyst expectations, which would usually send the stock down the following day. Before Google's earnings were released, Galleon Group purchased put options and sold Google's stock short in hopes of turning a profit, which, of course, they did, to the tune of $8 million.
Shares of Polycom and Hilton Hotels were also involved in the insider trading, according to the complaint. The FBI said it obtained its information by placing a wiretap on several phones--including Rajaratnam's mobile phone--as well as the participation of confidential witnesses.
Rajaratnam was named to Forbes' 2009 list of the world's billionaires, with an estimated net worth of $1.3 billion. He is a former employee of Needham & Co., an investment bank.