Insider Trading at the Galleon Group*

The Galleon Group was a privately owned hedge fund firm that provided services and
information about investments such as stocks, bonds, and other financial
instruments. Galleon made money for itself and others by picking stocks and
managing portfolios and hedge funds for investors. At its peak, Galleon was
responsible for more than $7 billion in investor income. The company's philos- ophy
was that it was possible to deliver superior returns to investors without employing
common high-risk tactics such as leverage or market timing. Founded in 1997,
Galleon attracted employees from prestigious investment firms such as Goldman
Sachs, Needham & Co., and ING Barings. Every month the company held meetings where
executives explained the status and strategy of each fund to investors. In
addition, Galleon told investors that no employee would be personally trading in
any stock or fund the investors held.
In 2009 Raj Rajaratnam, the head of Galleon, was indicted on 14 counts of
securities fraud and conspiracy, as well as sued by the Securities and Exchange
Commission (SEC) for insider trading He and five others were accused of using
nonpublic information from company insiders and con- sultants to make millions in
personal profits. Rajaratnam's trial began in 2011, and although he pleaded not
guilty, he was convicted on all 14 counts, fined over $158 million in civil and
criminal penalties, and is currently serving an 11-year sentence.
RAJ RAJARATNAM
Rajaratnam, born in Sri Lanka to a middle-class family, received his bachelor's
degree in engineering from the University of Sussex in England. In 1983 he earned
his MBA from the University of Pennsylvania's Wharton School of Business. With a
focus on the computer chip industry, he meticulously developed contacts. He went to
manufacturing plants, talked to employees, and connected with executives who would
later work with Galleon on their compa
nies' IPOs.
In 1985 the investment banking boutique Needham & Co. hired Rajaratnam as an
analyst. The corporate culture at Needham & Co. profoundly influenced Rajaratnam
and his business philoso- hotel rooms and take midnight flights to and from
meetings. The company also urged analysts to gather as much information as
possible. They were encouraged to sift through garbage, question disgruntled
employees, and even place people in jobs in target industries. Analysts went to
pro- fessional meetings, questioned academics doing research and consulting, and
set up clandestine agencies that collected information. At Needham & Co.,
Rajaratnam developed an aggressive net- working and note-taking research strategy
that enabled him to make accurate predictions about
companies' financial situations.
Rajaratnam rose rapidly through the ranks at Needham to become president of the
com- pany by 1991. Rajaratnam's personality also began to impact the company's
culture. Rajaratnam
*This case was prepared by John Fraedrich, Harper Baird, and Michelle Urban. Isaac
Emmanuel provided editorial assistance. It was prepared for classroom discussion
rather than to illustrate either effective or ineffective handling of an
administrative, ethical, or legal decision by management. All sources used for this
case were obtained through publicly
available material