Case 11: Insider Trading at the Galleon Group

once told a new analyst that Needham's name was on the company, but he was the real
center of power, the one who "makes things happen." He began to push ethical limits
when gather- ing information about companies. For example, concerns about
Rajaratnam's activities ended stock brokerage Paine, Webber and Co.'s interest in
buying Needham. Soon, similar worries spurred complaints from some inside Needham.
By 1996, at least five Needham executives were concerned about Rajaratnam's
conduct. Additionally, many of Needham's clients complained. Rajaratnam's multiple
company roles as president, fund manager, and sometimes stock analyst were a
potential conflict of interest situation; investment banks usually separate those
roles to prevent clashes between the interests of clients and bank-run funds. In
1996, after 11 years at Needham, Rajaratnam left the company and started the
Galleon Group, taking several Needham employees with him.
ACCUSATIONS OF INSIDER TRADING AT GALLEON
At Galleon, Rajaratnam developed a flamboyant leadership style. During one meeting,
Rajaratnam hired a dwarf to act as an analyst assigned to cover "small-cap" stocks.
At another meeting, when Taser International, Inc. executives came to make an
investment pitch, Rajaratnam offered $5,000 to anyone who would agree to be
shocked. One trader, Keryn Limmer, volunteered to be tased and was rendered
unconscious. Rajaratnam also used his personal fortune to grow Galleon's business.
For the 2007 Super Bowl, he threw a lavish party for wealthy investors and
executives at a $250,000-a-week mansion on a man-made island in Biscayne Bay off
the Florida coast.
At the same time, Rajaratnam contributed to various causes promoting development in
the Indian subcontinent, as well as programs benefiting lower-income South Asian
youths in the New York area. He joined the board of the Harlem Children's Zone, an
educational nonprofit. He also raised nearly $7.5 million for victims of the 2004
South Asian tsunami. For his philanthropy, he was later honored with a symphony
performance at the Lincoln Center in
New York.
However, Rajaratnam was already in trouble with the government. In 2005 he paid
over $20 million to settle a federal investigation into a fake tax shelter used to
hide $52 million from taxation. Rajaratnam and his business partner then sued their
lawyers, claiming they had no idea the shelter was illegal; the pair was awarded
$10 million in damages. Galleon also paid $2 million in 2005 to settle an SEC
investigation into its stock trading practices. In addition, Intel discovered in
2001 that Roomy Khan, an Intel employee, had leaked information about sales and
production to Rajaratnam. When Khan left Intel, she took a job with Galleon.
Although Intel reported the incidents to the authorities, and Khan served six
months of house arrest after pleading guilty to wire fraud and agreeing to
cooperate in the investigation against Rajaratnam, the prosecutors could
not
prove that Rajaratnam actually made trades based on the inside information. As a
result, the
investigation
was abandoned.
is a constant struggle to gather key information that can predict changes in stock
prices, quarterly Analysts live or die by the information they acquire on publicly
traded firms. As such, there reports, and revenue. Rajaratnam had a deep network of
acquaintances, including employees at Goldman Sachs Group, Intel Corp., McKinsey &
Co., and Applied Materials, Inc. However, federal
investigators
were suspicious that the networking and research at Galleon involved methods more
illicit than simply maintaining a good contact list. In 2007 SEC lawyers discovered
a new text mes- sage from Roomy Khan advising Rajaratnam to "wait for guidance"
before buying a stock. The SEC convinced Khan to again cooperate in their
investigation and allow them to record her conversa- tions with Rajaratnam. This
single wiretap eventually led to the discovery of several insider trading rings as
investigators persuaded more people to participate in the operation over the course
of two years. Table 1 describes the central players.