An insider trading scandal at Galleon Group is forcing the hedge fund to unwind its $3.7 billion portfolio, as investors scramble to redeem their holdings.
In a letter obtained by Dow Jones Newswires, Galleon founder Raj Rajaratnam told employees and investors that he is innocent but "that it is now in the best interest of our investors and employees to conduct an orderly wind down of Galleon's funds while we explore various alternatives for our business," reported The Wall Street Journal.
The unraveling of the hedge fund was the latest development in a massive insider-trading case brought by the U.S. Securities and Exchange Commission (SEC) that led to arrests and charges against six people last Friday - including Rajaratnam, who is free on a $100 million bail.
Many Galleon investors had already tried to withdraw their money as the company was swamped with over $1 billion in redemption requests after the arrests. The firm was one of the three largest managers of technology hedge funds.
"The redemptions coming in were likely so large, and no one wants to be the last out the door," Brad Balter head of Boston-based Balter Capital Management LLC, which allocates investments to hedge funds, told Bloomberg News. "As an investor, you don't want that in your portfolio, even if the charges haven't been proven."
But panicked investors are hamstrung by Galleon's redemption policies, which require a 45-day processing period. They will not get their money back until Jan. 1, 2010 unless the government intervenes, a person familiar with the matter told The Journal.
The charges stem from a series of trades involving a who's who of technology companies including Intel Corp. (NASDAQ: INTC), Google Inc. (NASDAQ: GOOG), Advanced Micro Devices Inc. (NASDAQ: AMD), Clearwire Corp. (NASDAQ: CLWR) and Akamai Technologies Inc. (NASDAQ: AKAM).
The complaint also includes allegations that Hilton Hotel officials informed an executive at Moody's Corp. (NYSE: MCO) that their company was being taken private by Blackstone Group LP (NYSE: BX). A cooperating witness provided the information to Rajaratnam, saying that it was "a sure thing," according to Market Folly.
Rjaratnam bought 400,000 shares the next day, eventually selling them for a profit of $4 million. For passing along the tip, the Moody's analyst received $10,000, according to the complaint.
That was one of many conversations intercepted by the U.S. Federal Bureau of Investigation (FBI) on court-ordered wiretaps, which were used for the first time in an insider trading investigation.
The SEC targeted five other individuals in the complaint, including an executive from Intel Capital, the venture capital arm of Intel, one from McKinsey & Co. and a high ranking International Business Machines Corp. (NYSE: IBM) executive.
Robert Moffat, a senior vice president at IBM, who was considered a top candidate to succeed CEO Sam Palmisano, allegedly gave insider information about IBM and Sun Microsystems Inc. (NASDAQ: JAVA) to Danielle Chiesi of New Castle Partners, who also was arrested. Moffat has since been placed on leave.
Anil Kumar, who became a star partner at McKinsey, was charged with securities fraud and conspiracy on allegations he gave Galleon information about an impending $6 billion investment in computer-chip maker AMD by an Abu Dhabi government-owned fund.
Kumar allegedly called Rajaratnam on Aug. 15, 2008 and told him "I think you can now just buy [AMD stock]," after learning the parties had shaken hands on the deal, The National reported.
Rajaratnam then bought at least 16 million shares in AMD between August and October of last year, court documents say.
Although Kumar has denied the charges, McKinsey has placed him on indefinite leave, and the scandal has shaken the highly respected and trusted consulting company.
"This case is unprecedented in our history," McKinsey spokesman Michael Stewart told The Journal. "We have never had a case of a partner or anyone else in the firm being charged with criminal activity, if the allegations are true."
News & Related Story Links:
- The Wall Street Journal:
Galleon to Wind Down Hedge Funds - Bloomberg:
Galleon to Liquidate Funds; Said Approached on Assets
- Market Folly:
Insider Trading: Raj Rajaratnam Of Hedge Fund Galleon Group Charged - The National:
Galleon charge linked to ATIC deal
- The Wall Street Journal:
A Star Partner's Galleon Arrest Shakes Up Ranks at McKinsey