Massive global insider trading ring unearthed

Six people, among them a well-known hedge fund kingpin and executives from blue chip companies the likes of IBM and McKinsey, have been arrested in what has been described as the biggest insider-trading scandal in a generation.

Both the US Attorney in Manhattan and the Securities and Exchange Commission have accused the group of running, between 2006 and 2008, an insider-trading ring that paid informants for privileged commercial information. The group then used this information to realise gains in the investment markets to the tune of US$20 million, according to the report which appeared in the Wall Street Journal.

At the centre of the scandal is Sri-Lankan-based New York hedge fund manager Raj Rajaratnam. Rajaratnam, known as a prolific investor of technology stocks, is a founder of the Gallon Group, which manages US$3.7 billion in assets. He was arrested at 6am on the morning of October 17, after the FBI raided his New York apartment.

He has been charged with committing securities fraud, conspiracy to commit securities fraud, as well as a civil charge of insider trading. The other executives arrested were Robert Moffat , 53, an executive who ran the supply chain department at IBM, Rajiv Goel , 51, a treasury department executive at Intel, Anil Kumar, 51, a director at consulting firm McKinsey, as well as Mark Kurland, 60, and Danielle Chiesi, 43, who both worked at a hedge fund group called New Castle Partners.

The complaints, which were compiled through the use of phone wiretaps, alleged that the group swapped information that could affect stock prices, but which has not yet been made public.

The report said the court filings, which contained excerpts of taped conversations, showed that Rajaratnam and his co-conspirators treated informants as if they were outsourced analysts, at times discussing earnings projections and deals.

Among the deals that the group were privy to was the bid by the Blackstone Group to take the Hilton chain of hotels private. Using this information, The Galleon Group bought and sold 400,000 Hilton shares, and earned an illicit profit of US$4 million. An analyst at Moody’s Investors Service received US$10,000 for the tip, the report said.

Cooperating witnesses who provided information to the group said Rajaratnam and his cohorts were similarly alerted to sensitive commercial information at wireless broadband service provider Clearwire, Google, and Sun Microsystems. The network of informants also allegedly extended to companies including internet platform provider Akamai Technologies, chipmaker Advanced Micro Devices, investor relations firm Market Street Partners, telecommunications equipment manufacturer Polycom, and software maker Peoplesoft.