BOSTONBOSTON— A hedge fund company whose manager is criminally charged in an insider trading case has told clients it’s shutting down its funds, after investors pulled out millions in the wake of the allegations.
A letter obtained Wednesday by The Associated Press said Galleon Group LLP plans “an orderly wind down” of its funds while it explores “various alternatives for its business.” Portfolio manager Raj Rajaratnam, who is currently free on $100 million bail, wrote to clients and employees that he wants to reassure them the funds are liquid, meaning assets such as stock holdings can be converted to cash for distribution to fund shareholders.
New York-based Galleon Group manages about $3.7 billion. Prosecutors who filed the case against Rajaratnam and five others on Friday said Galleon had previously managed up to $7 billion. Publicity surrounding the case led some investors to withdraw money.
Galleon Group’s letter did not specify what business options the company was exploring. A person familiar with the situation said Galleon had been approached by parties interested in a possible purchase of the company. The person requested anonymity because of the sensitive nature of the situation.
The person said distributions to shareholders were expected to follow normal procedures for the funds, with cash to be returned starting Jan. 1. Hedge funds typically restrict how quickly investors can get cash back, with waiting periods that can stretch several weeks.
Rajaratnam is accused of conspiring to use insider information to trade securities in several publicly traded companies, including Google Inc. In Wednesday’s letter, he said he’s “innocent of all charges.”
Rajaratnam, 52, was ranked No. 559 by Forbes magazine this year among the world’s wealthiest billionaires, with a $1.3 billion net worth. Rajaratnam has been described as a savvy manager of billions of dollars in technology and health care hedge funds at Galleon, which he started in 1996.
Prosecutors who announced the case Friday said it was the largest ever brought against a hedge fund. The Securities and Exchange Commission, which brought separate civil charges, said the scheme generated more than $25 million in illegal profits.
Galleon Group said it had no knowledge of the investigation before it was made public. The company said it intended to cooperate with authorities.
Prosecutors say Rajaratnam obtained insider information and then caused the Galleon Technology Funds to execute trades that earned a profit of more than $12.7 million between January 2006 and July 2007. Other schemes garnered millions more and continued into this year, authorities said.
Also charged are Rajiv Goel, 51, of Los Altos, Calif., a director of strategic investments at Intel Capital, the investment arm of Intel Corp., Anil Kumar, 51, of Santa Clara, Calif., a director at McKinsey & Co. Inc., a global management consulting firm, and Robert Moffat, 53, of Ridgefield, Conn., senior vice president and group executive at International Business Machines Corp.’s Systems and Technology Group.
Others charged in the case were identified as Danielle Chiesi, 43, of New York City, and Mark Kurland, 60, also of New York City.
IBM put Moffat on leave Monday after the senior vice president was charged. Moffat is accused of supplying Chiesi, who worked for a hedge fund known as New Castle, with details about IBM’s earnings, Sun Microsystems’ performance and other matters.
Intel has also put Goel on leave.
Meanwhile, Google Inc. has suspended the services of San Francisco-based PR consulting firm Market Street Partners while it conducts an internal investigation, according to media reports Wednesday. The SEC has alleged that an employee of the firm tipped the SEC’s informant – identified in the complaint as “Tipper A” – to nonpublic information about Google’s 2007 second-quarter earnings, which both the informant and Rajaratnam traded on for profit.
A lawyer for Market Street told The Associated Press Wednesday evening that the government has assured the company that none of the firm’s current employees or management did anything wrong in connection with the Galleon insidertrading investigation.
“After first learning of the incident in the newspapers, we reached out to the U.S. Attorney’s Office to offer the company’s full support and cooperation. We will continue to offer our assistance to the government, and we are now evaluating whether to initiate legal action against a former employee of the firm,” said Miles Ehrlich of Berkeley, Calif.-based law firm Ramsey & Ehrlich LLP, in a statement.
He said the company will be working closely with Google and other longtime clients “to make sure that any of their questions are answered fully and completely.”
According to the SEC complaint, “Tipper A” first met Rajaratnam about 1996, and they worked together at Galleon for a time in the late 1990s. In late 2005, undergoing financial difficulties, the SEC says “Tipper A” approached Rajaratnam about rejoining Galleon.
The Wall Street Journal, citing anonymous sources familiar with the matter, reported that the “Tipper A” is hedge-fund manager Roomy Khan.
Rajaratnam allegedly inquired whether “Tipper A” had inside information on any public companies. “Tipper A” agreed to provide details on Polycom Inc. – gleaned from a Polycom source – in hopes of securing a job at Galleon and becoming privy to any future inside tips from Rajaratnam, according to the complaint. The SEC says that Galleon Tech funds and “Tipper A” made hundreds of thousands of dollars off the Polycom inside tips in 2006.
According to the complaint, “Tipper A” in July 2007 also obtained confidential information regarding a private-equity takeover of Hilton from an analyst at the credit ratings firm Moody’s. “Tipper A” and Rajaratnam both allegedly traded on the inside tip, with “Tipper A” reaping more than $630,000 in profit and Galleon Tech funds gaining profit of over $4 million. Tipper A then paid the source $10,000, the SEC said.
Within a week, the SEC said Tipper A” obtained the inside information about Google and passed it on to Rajaratnam, profiting on the tip at over $500,000 and $9.3 million, respectively. The Google source then allegedly said further tips would cost $100,000 to $150,000 per quarter, which “Tipper A” declined to pay. No further tips were passed along from that source, according to the complaint.
The SEC accuses Goel of repeatedly contacting Rajaratnam with inside information about Intel’s financial results in 2007 and a joint venture between wireless network operator Clearwire and Sprint in 2008 – some of which Rajaratnam passed along to “Tipper A.” The complaint also alleges that Rajaratnam traded on insider information concerning back-office outsourcing firm PeopleSupport in 2008 on Goel’s behalf.
Chiesi and Kurland have been charged with insider trading in shares of technology firm Akamai on behalf of New Castle funds in 2008, and passing along some tips to Rajaratnam. Kumar is alleged to have provided nonpublic information to Rajaratnam in 2008 about chip maker Advanced Micro Devices’ transactions with two Abu Dhabi sovereign firms which he learned about in his role as a McKinsey & Co. director.
