March 22 (Bloomberg) -- Rengan Rajaratnam, the younger brother of imprisoned hedge-fund founder Raj Rajaratnam, was indicted by a federal grand jury on charges he took part in an insider-trading scheme tied to Galleon Group LLC.
Rengan Rajaratnam, 42, is accused of conspiring with his brother to trade on material nonpublic information about Clearwire Corp. and Advanced Micro Devices Inc. in 2008, Manhattan U.S. Attorney Preet Bharara said yesterday.
Prosecutors alleged that Rengan, while working as a fund manager at Galleon, made almost $1.2 million from trades that occurred on March 24 and March 25 of that year based on tips provided by his brother and his Rolodex of insiders. He was implicated during his brother’s trial, where wiretapped conversations between the two men were played in court.
“Rengan Rajaratnam and his brother shared more than DNA,” Bharara said in a statement. “Along with his brother Raj, Rengan Rajaratnam was allegedly at the heart of an insider- trading scheme that swept up an unprecedented number of people in its web of corruption.”
The U.S. Securities and Exchange Commission also filed a parallel insider-trading suit against Rengan Rajaratnam, describing a conspiracy that the agency said began in 2006 and lasted until 2008. Rajaratnam reaped more than $3 million in illicit gains for Galleon and Sedna, the SEC alleged. The SEC said its investigation is continuing.
Rengan Rajaratnam was named in a federal indictment unsealed yesterday in federal court in Manhattan that charges him with one count of conspiracy to commit securities fraud and six counts of securities fraud. Conspiracy carries a maximum five-year prison sentence, while fraud carries a 20-year maximum. He’s not in U.S. custody, Bharara said.
The criminal case was assigned to U.S. District Judge Naomi Reice Buchwald while the SEC case was assigned to U.S. District Judge John Koeltl.
David Tobin, an attorney for Rengan Rajaratnam, didn’t immediately return a call seeking comment on the charges.
Rengan Rajaratnam co-founded Sedna Capital Management LLC, a hedge fund advisory firm, after leaving SAC Capital Advisors LP where he worked as an analyst from May 2003 to January 2004.
A graduate of the University of Pennsylvania and Stanford University’s business school, he has also worked at Morgan Stanley. The SEC alleges that after Rengan Rajaratnam closed down Sedna he worked for as a portfolio manager at Galleon from 2007 to 2009 when the fund closed after his brother’s arrest on insider-trading charges.
Raj Rajaratnam, 55, is serving an 11-year prison sentence after being convicted on 14 counts of conspiracy and securities fraud in 2011 in the largest crackdown on insider trading at hedge funds in U.S. history. Dozens of people have been convicted as part of the probe being handled by the Federal Bureau of Investigation in New York and Bharara’s office.
“Rengan Rajaratnam’s career arc paralleled his brother’s,” FBI Assistant Director George Venizelos said in a statement. “He followed in Raj’s footsteps by obtaining an MBA from a top-flight business school. He went to work for Raj at Galleon. As alleged in the indictment, Rengan also engaged in the same illegal conduct as Raj.”
Rengan Rajaratnam took illicit tips from his brother and traded on AMD, Clearwire, Polycom Inc., Hilton Hotels Corp. and Akamai Technologies Inc., regulators said.
The indictment filed yesterday quotes from telephone calls that were secretly recorded by agents with the FBI and played during Raj Rajaratnam’s 2011 trial. The case was the first to make extensive use of wiretaps, a tactic used in organized-crime investigations. At his trial, jurors heard more than 40 recordings of Rajaratnam made by FBI agents in New York, in which the fund manager can be heard gathering secret tips from his sources.
Rajiv Goel, a former Intel Corp. who pleaded guilty to insider trading with Raj Rajaratnam, testified that he told the Galleon co-founder Intel would invest $1 billion in a new wireless network company formed by Clearwire and Sprint Nextel Corp. Goel was a friend of Raj Rajaratnam’s and his former business school classmate.
The U.S. alleged that Raj passed the tip about Clearwire to Rengan in March 2008 so the two could execute trades on Goel’s tip. On March 25, 2008, six days after Goel and Raj spoke, the FBI recorded the brothers discussing a newspaper article describing the deal.
“It’s all over the Wall Street Journal,” Rengan told his brother at 8:22 p.m., according to the wiretapped recording played for jurors in Manhattan federal court. “They’re short on details, but they kind of say, you know, they’re looking to raise as much as $3 billion.”
“OK, sh-t,” Raj Rajaratnam replied. “But I think Clearwire’s share price is gonna rip tomorrow.”
A day later, Clearwire’s price rose sharply in response to the article, prosecutors said. The U.S. said that Rengan made $101,000 trading on Clearwire in his own personal brokerage account, that he and his his brother made more than $231,000 for a Galleon fund and that Raj took in more than $851,000 for a Galleon technology fund, according to prosecutors.
Prosecutors also described trading in AMD based on tips provided by Anil Kumar, then a director at McKinsey & Co., that the chipmaker was getting a multibillion-dollar investment from Mubadala Development Co. of Abu Dhabi. Kumar was also a friend of Raj Rajaratnam and had been a business school classmate of the fund manager.
“I just heard that ... AMD had a handshake with the ... Arabs to put in six billion dollars,” Raj Rajaratnam told his brother on an Aug. 15, 2008, call, which was cited by prosecutors in yesterday’s indictment.
Later that day, Rengan Rajaratnam called his brother to tell him he had conferred with David Palecek, a former Stanford classmate who was in charge of semiconductors for McKinsey. Rengan Rajaratnam said he asked Palecek about buying AMD stock and the proposed deal.
Rengan later called his brother that day and told him Palecek had “spilled his beans” about the deal.
“He’s like, ‘Buy it, buy as much as you can as soon as you can,’” Rengan Rajaratnam told his brother on the call.
In a later conversation that was also wiretapped, Rengan told Raj that his former Stanford friend was “a little dirty” and that he was “definitely, you know, thinking about playing ball” with Galleon.
“‘He said my best ideas are inside information,’” Rengan quoted Palecek as telling him. Rengan told his brother during a later call and later said referring to Palecek, “Scumbag, everybody is a scumbag.”
Palecek died in 2010 of a virulent staph infection, his lawyer, Catherine Redlich, said during Rajaratnam’s 2011 trial.
“What the tape does not reflect is that Mr. Palecek never agreed to ‘play ball’ with the Rajaratnams, never received money from them, and never agreed to put his wife on Galleon’s payroll,” Redlich said.
Prosecutors said that neither Rengan nor Raj Rajaratnam made any money on the AMD tip because of an overall decline in technology stocks, prosecutors said.
During a 2010 pretrial hearing in Raj Rajaratnam’s case, prosecutors and regulators said they were first drawn to focus on insider trading by Rengan Rajaratnam in 2006.
An earlier investigation by the SEC and U.S. prosecutors in San Francisco in 1999 had only resulted in the prosecution of former Intel employee Roomy Khan. She pleaded guilty in April 2001 to wire fraud and agreed to cooperate with the U.S.
Andrew Michaelson, one of the principal SEC lawyers investigating Galleon in the later probe testified that in September 2006 the agency opened an insider-trading probe focusing on Galleon because Raj and Rengan Rajaratnam “appeared to be exchanging nonpublic information.”
Michaelson, who would later be a prosecutor on the Raj Rajaratnam’s trial team, said the SEC questioned Sedna and Galleon employees under oath, reviewed millions of pages of documents and looked at every one of Rengan Rajaratnam’s e-mails and instant messages for 2006. Soon regulators had another target: Raj Rajaratnam, Rengan’s older brother, he said.
Prosecutors said that after they “hit a wall” in the criminal investigation of Raj Rajaratnam, they decided to employ court-authorized wiretaps against the fund manager.
The recordings would eventually also ensnare Rajat Gupta, the former Goldman Sachs Group Inc. director who was caught on wiretapped calls talking to Rajaratnam.
Gupta, 64, who also sat on the board of Cincinnati-based Procter & Gamble Co. and ran the consulting firm McKinsey & Co. from 1994 to 2003, was convicted in June of passing insider tips to Rajaratnam in a conspiracy that ran from 2007 to January 2009.
Gupta, who was sentenced to two years in prison, is free pending his appeal.
Bharara’s office has charged and won convictions against more than 75 people with insider trading since August 2009, including more than two dozen people tied to the Galleon probe.
The SEC said yesterday that it has sued 33 defendants in its Galleon-related enforcement actions, with insider-trading reaping more than $96 million in illicit profits by trading in stock of more than 15 companies.
The criminal case is U.S. v. Rajaratnam, 13-cr-00211, U.S. District Court, Southern District of New York (Manhattan); the civil case is SEC v. Regan Rajaratnam, 13-cv-01894, Southern District of New York (Manhattan).
--With assistance from Bob Van Voris and Saijel Kishan in New York. Editors: Andrew Dunn, Glenn Holdcraft