Thursday, March 21, 2013

Raj Rajaratnam’s Brother Charged With Insider Trading

By Patricia Hurtado, Bloomberg

Rengan Rajaratnam, the younger brother of imprisoned hedge-fund founder Raj Rajaratnam, was indicted by a federal grand jury for allegedly taking 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. (AMD) in 2008, Manhattan U.S. Attorney Preet Bharara said today.

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. He was implicated during his brother’s trial, where wiretapped conversations between the two men were played in court.

“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,”Bharara said in a statement. The U.S. Securities and Exchange Commission filed a lawsuit against Rengan Rajaratnam.

Prosecutors charged 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.

David Tobin, an attorney for Rengan Rajaratnam, didn’t immediately return a call seeking comment on the charges.

Prison Term

Rengan Rajaratnam co-founded Sedna Capital Management LLC, a hedge fund advisory firm. He also worked at SAC Capital Advisors LP from May 2003 to January 2004. A graduate of theUniversity of Pennsylvania and Stanford University’s business school, he has also worked at Morgan Stanley.

Raj Rajaratnam is serving an 11-year prison sentence after being convicted 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.

The SEC’s parallel insider-trading suit against Rengan Rajaratnam describes 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.

‘Sad Tale’

“Our complaint against Rengan Rajaratnam tells a sad tale of a man who followed his brother down an illegal path of greed to its inevitable conclusion,” George Canellos, acting director of the SEC’s Division of Enforcement, said in a statement. The SEC said its investigation is continuing.

Rengan Rajaratnam took illicit tips from his brother and traded on AMD, Clearwire (CLWR), Polycom Inc. (PLCM), Hilton Hotels Corp. and Akamai Technologies Inc., regulators said.
The indictment filed today quotes from telephone calls that were secretly recorded by agents with the FBI and played during Raj Rajaratnam’s 2011 trial.

Rajiv Goel, a former Intel Corp. (INTC) official 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.

Tapped Phone

The U.S. alleged that Rengan Rajaratnam obtained nonpublic information about Clearwire in March 2008 from Raj. 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.”

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 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.

Abu Dhabi

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.

“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 today’s indictment.

Later that day, Rengan Rajaratnam called his brother to tell him he had conferred with a former Stanford classmate who was in charge of semiconductors for McKinsey. Rengan Rajaratnam said he asked the classmate about buying AMD stock.

“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.

No Money

The brothers didn’t make any money on the AMD tip because of an overall decline in tech stocks, prosecutors said.

During a pretrial hearing in Raj Rajaratnam’s case, prosecutors and regulators said they focused on insider trading by Rengan Rajaratnam in 2006.

Andrew Michaelson, one of the principal SEC lawyers investigating Galleon and later a prosecutor on the Raj Rajaratnam trial team, 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 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.

The case is U.S. v. Rajaratnam, 13-cr-0211, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Patricia Hurtado in New York federal court at pathurtado@bloomberg.net; Bob Van Voris in Manhattan federal court at rvanvoris@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net
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