hedge fund manager

Obama Seeks to Win Back Wall St. Cash

June 13, 2011 by NewsMaker Leave a Comment

The guests were asked for their thoughts on how to speed the economic recovery, then the president opened the floor for over an hour on hot issues like hedge fund regulation and the deficit.

Mr. Obama, who enraged many financial industry executives a year and a half ago by labeling them “fat cats” and criticizing their bonuses, followed up the meeting with phone calls to those who could not attend.

The event, organized by the Democratic National Committee, kicked off an aggressive push by Mr. Obama to win back the allegiance of one of his most vital sources of campaign cash — in part by trying to convince Wall Street that his policies, far from undercutting the investor class, have helped bring banks and financial markets back to health.

Last month, Mr. Obama’s campaign manager, Jim Messina, traveled to New York for back-to-back meetings with Wall Street donors, ending at the home of Marc Lasry, a prominent hedge fund manager, to court donors close to Mr. Obama’s onetime rival, Hillary Rodham Clinton. And Mr. Obama will return to New York this month to dine with bankers, hedge fund executives and private equity investors at the Upper East Side restaurant Daniel.

“The first goal was to get recognition that the administration has led the economy from an unimaginably difficult place to where we are today,” said Blair W. Effron, an investment banker closely involved in Mr. Obama’s fund-raising efforts. “Now the second goal is to turn that into support.”

The president’s top financial industry supporters say they are confident that the support Mr. Obama needs will ultimately be there, despite the financial industry’s unhappiness over his efforts to tighten regulation of their businesses. But it is clear that those supporters will have to work much harder to win over the financial services industry than they did in 2008, before Wall Street’s bust, the subsequent clashes over policy and the sometimes bitter personal differences that lingered afterward.

Executives at large investment banks, a group that gave generously to Mr. Obama in his last campaign, are remaining on the sidelines for now. Only a small handful of such donors have appeared in Mr. Obama’s joint campaign filings with the Democratic National Committee, though officials there said more would appear in the coming weeks.

Some traditional heavy hitters in Democratic Wall Street fund-raising have stepped out of the game. They include Maureen White and her husband, Steven L. Rattner, a founder of the Quadrangle Group, whose Fifth Avenue living room was a critical conduit between Wall Street and Democratic candidates in the years before Mr. Rattner joined the Obama administration to help restructure the auto industry. The couple did not resume their old role after Mr. Rattner left government, and he was caught up last year in an investigation into kickbacks to New York’s state pension fund.

And even as some criticize the president for listening too closely, they say, to Wall Street on issues like the 2008 bailout and financial regulation, he has suffered some unusually public defections and criticism by some former Wall Street supporters, who view his policies and rhetoric as unfair to their industry. Many are Republicans whose support last time around burnished his image as a post-partisan problem solver.

And as Mr. Obama seeks to rebuild, Mitt Romney, a former Massachusetts governor who is seeking the Republican presidential nomination, is using his background as a venture capital executive and his policy proposals to woo financial-industry donors.

Last week, Mr. Romney held three fund-raisers in Greenwich, Conn., and New York, including a reception hosted by Anthony Scaramucci, a hedge fund manager who donated to Mr. Obama in 2008. Mr. Scaramucci said he wanted a president who embodied pragmatism and middle-of-the-road solutions. In 2008, that candidate was Mr. Obama, he said; today, it is Mr. Romney.

“He seemed like he was going to be a transformative candidate,” Mr. Scaramucci said of Mr. Obama in an interview. “I’m really not an ideological guy, and I think the country right now needs more practical, less partisan people.”

To offset those defections, Mr. Obama’s campaign has deployed a corps of loyal Wall Street supporters who have fanned out to defend the president’s record and stoke fatigued donors. They include Robert Wolf, the chief executive of UBS Group Americas; the hedge fund managers Orin S. Kramer and Eric Mindich; and Mark T. Gallogly, a co-founder of Centerbridge Partners.

Article source: http://feeds.nytimes.com/click.phdo?i=996f05ad439db82b62b469e0a4765c97

Filed Under: Business News Tagged With: hedge fund manager, hillary rodham clinton, vital sources

A Hedge Fund Manager’s Latest Bet: The Mets

May 27, 2011 by NewsMaker Leave a Comment

But Mr. Einhorn — one of a handful of hedge fund managers followed by investors looking for the next smart play — insists that he spends far more time trolling through the bargain bin, looking for companies with potential that others have dismissed, then betting on their long-term revival.

On Thursday, in announcing that he has entered into exclusive negotiations to spend $200 million for a noncontrolling stake in the Mets, Mr. Einhorn, 42, may be making one of his most intriguing long-term bets yet.

The Mets, as their principal owner said in comments published this week, are lousy, snakebitten and bleeding cash, having lost $50 million last year alone. Attendance has plummeted at Citi Field, their expensive new ballpark in Queens. Perhaps most daunting, the trustee for the victims of Bernard L. Madoff’s Ponzi scheme has sued the team’s owners for $1 billion.

Mr. Einhorn did his best Thursday to sound like a friendly investor in a team very much in need of friends. He spoke fondly of dressing on Halloween as Dave Kingman, the face of the Mets during lean years three decades ago. He coaches his daughter’s Little League team. He said that he had, while growing up in Milwaukee, hit home runs into the backyard of the baseball commissioner, Bud Selig.

Mr. Einhorn emphasized that his investment in the Mets was not related to any of the $8 billion or so he manages at Greenlight Capital, his hedge fund. He sent an e-mail to investors to clarify the distinction and acknowledged that he understood that rehabilitating a troubled franchise would not be swift or easy.

“Baseball is a tough sport, and everyone wants to win more games,” said Mr. Einhorn, who would become one of a handful of financial moguls to own a professional sports team. “Over time, there is going to be losing seasons and tough seasons and winning seasons and hopefully championship seasons. I hope to experience all of those.”

Forbes magazine values the Mets at $747 million, 13 percent less than last year. The true value of the team, though, will not be known until it is clear what percentage of the club Einhorn will get for his $200 million.

Despite the team’s problems, Mr. Einhorn’s proposed stake in the Mets — which must be completed with the team and approved by Major League Baseball — fits a pattern. He enjoys making money, and seems to enjoy almost as much crowing about how right his often blunt, often controversial investment analysis typically proves to be.

Indeed, he wrote a book detailing his prescience and some of the ills of the financial industry. It was titled, “Fooling Some of the People All of the Time.”

Mr. Einhorn does not seem to have the makeup of a hard-charging hedge fund manager. Mild-mannered, he speaks deliberately and softly. He was born in Demarest, N.J., and his family moved to Milwaukee when he was 7. He graduated from Cornell with a degree in government, not economics or business.

While many fund managers work well into the night, Mr. Einhorn is known to leave the office early enough to get home to Westchester for his daughter’s Little League games. He is active in several charities and, with his wife, Cheryl, set up a trust whose mission is to help people get along better.

But Mr. Einhorn also grew up in a financially minded home. His father is a banker who helps facilitate mergers and acquisitions. Mr. Einhorn helped found his hedge fund in 1996, when he was in his late 20s — a young age by industry standards — with less than a million dollars, much of which came from his parents.

He is a believer in so-called value investing, a strategy made famous by the likes of Warren E. Buffett (he once paid $250,000 to have lunch with the legendary investor), which holds that the best investments are made in good companies that are cheap. He will spend months reviewing a company’s financial information, searching for hidden value. He can then bet big, sometimes on the order of hundreds of millions.

Mr. Einhorn is fond of quoting Ken Griffey Jr. when talking about his investment style: “I don’t consider myself a home run hitter. But when I’m seeing the ball and hitting it hard, it will go out of the park.”

Like Mr. Buffett, Mr. Einhorn has a shrewd, quick mind, according to several hedge fund managers, skills that undoubtedly came in handy in 2006, when he entered the World Series of Poker as a relative novice in conventional gambling. He finished 18th out of 8,773 contestants.

His brand of poker is something of a metaphor for his style of business. Playing Texas Hold ’em, Mr. Einhorn told New York magazine in 2008, is about waiting for a chance to pounce, then pressing the advantage. “We make bigger bets every day,” he said of his day job. “There’s more at risk in what happens in Microsoft than I could ever bet on a poker table.”

His big bets and the economics of hedge funds help explain why he can afford to spend $200 million on a money-losing team. Hedge funds invest money for the wealthy as well as pension funds and other institutions.

Mr. Einhorn charges investors 1.5 percent to manage their money and 20 percent of any profits generated, investors in the fund say. Since its inception, his fund has returned 19 percent to investors on average per year.

While some hedge funds engage in campaigns to replace executives of the companies they own, Mr. Einhorn is often quiet when dissatisfied. But when he does go public, his words can move the markets. On Wednesday, Mr. Einhorn derided Steve Ballmer, the chief executive of Microsoft, as “stuck in the past” and suggested its board look to replace him. Mr. Einhorn owned about nine million shares of the company as of the end of March, according to a regulatory filing, worth about $200 million.

Since his comments, the shares are trading up about 2 percent.

His investment in the Mets may be more problematic. The team, run as a family business, has not had to acknowledge outsiders in the boardroom. Some smart people on Wall Street looked at the Mets’ books and walked away because the team refused to sell part of its share in SNY, its profitable cable network. Mr. Einhorn has decided to pay only for shares in the team.

The decision has some investors wondering whether he sees an angle no one else discovered.

“He’s a value guy,” said Anthony Scaramucci, a managing partner at the investment firm SkyBridge Capital, who was part of another group that looked to buy part of the Mets. “So you’d have to look at this as a growth opportunity and hold your nose and eyes for 10 years.”

Peter Lattman contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=be4fffd340521a62b79455df14f2e626

Filed Under: Business News Tagged With: dave kingman, hedge fund manager, hedge fund managers

DealBook: Galleon Chief’s Web of Friends Proved Crucial to Scheme

May 12, 2011 by NewsMaker Leave a Comment

John Marshall Mantel for The New York TimesAnil Kumar, a former director at McKinsey Company, was a prominent part of Raj Rajaratnam’s network of information.

As Raj Rajaratnam and Anil Kumar, a McKinsey consultant, walked out of a fund-raiser in Manhattan, Mr. Rajaratnam pulled his old friend aside and made him an offer: would Mr. Kumar provide him with insights for $500,000 a year?

“You have such good knowledge that is worth a lot of money to me,” he said, according to Mr. Kumar.

Mr. Kumar faced an agonizing choice. His employer barred its executives from outside consulting, but an extra half-million dollars a year — and the chance to do business with a powerful hedge fund manager — was tantalizing.

Weeks later, Mr. Kumar accepted.

That deal, struck on an autumn evening in 2003, was one of the many connections made by Mr. Rajaratnam over the years that gave him access to the inner secrets of dozens of publicly traded companies. His vast Rolodex of tipsters included former business school classmates, fellow hedge fund traders and technology industry executives whose origins, like his, were from the Indian subcontinent.

Azam Ahmed and Guilbert Gates/The New York Times Click on the above graphic to get a visual overview of the Galleon information network.

In many respects, Mr. Rajaratnam was no different from the thousands of Wall Street stock pickers who diligently network with corporate executives and industry experts to gain an investment edge. But Mr. Rajaratnam, a 53-year-old Sri Lankan native, sought out information that was confidential, beyond the reach of research, and illegally traded on it, a jury in Federal District Court in Manhattan found on Wednesday, convicting him on all 14 counts of securities fraud and conspiracy.

The verdict punctuates a stunning downfall for Mr. Rajaratnam, who before his arrest in October 2009 was among the biggest hedge fund managers. First making his name as an adept picker of technology stocks at Needham Company, a small New York investment bank, he rode the tech market boom to strike out on his own, forming the Galleon Group hedge fund. At his peak, he was managing more than $7 billion in assets.

What made Mr. Rajaratnam stand out was not his proprietary computer models nor his skills in security analysis. Instead, colleagues marveled at the deep set of contacts he had cultivated inside Silicon Valley executive suites and on Wall Street trading floors.

Many of Mr. Rajaratnam’s tipsters came from the South Asian immigrant community, a relatively small group of Indians, Pakistanis and Sri Lankans who over the past several decades have made their mark in finance and technology. He met several important sources of illegal information through the South Asian club at the Wharton business school at the University of Pennsylvania. He connected with another primary informant through his philanthropic support of the Indian School of Business, a prestigious graduate school in Hyderabad, India.

All these contacts formed the core of Mr. Rajaratnam’s vast information network. From his office on Madison Avenue, Mr. Rajaratnam collected data about technology companies and then swapped it with sources across the globe. He spoke of getting an edge to beat the stock market, and for Mr. Rajaratnam, that edge was information.

But the conversations between him and his network were being secretly recorded by federal agents beginning in 2008. Prosecutors received approval from a judge to place a wiretap on Mr. Rajaratnam’s phone after a government informant taped calls with Mr. Rajaratnam exchanging secret business information. The portrait that emerges from those tapes is of a man who bolstered his formidable talents as a money manager by tapping the insecurities and desires of those within his circle for lucrative — and illicit — stock tips.

Twenty-six people have been charged in the government’s case against Mr. Rajaratnam; 21 have pleaded guilty. Some of those accused as co-conspirators were direct contacts, including Galleon employees and board members at publicly traded companies. He dealt with others through intermediaries: in one case, a fellow trader gave him corporate secrets provided to her by a Moody’s credit analyst.

Among those in Mr. Rajaratnam’s circle, Mr. Kumar was one of the more prominent. They first met in the early 1980s while at the Wharton School.

Others included another Wharton classmate, Rajiv Goel, a hapless executive at Intel; Adam Smith, a hardworking Harvard graduate at Galleon; and Danielle Chiesi, a hedge fund trader with deep connections inside publicly traded technology companies. All three pleaded guilty to swapping illegal stock tips with Mr. Rajaratnam.

With these people, Mr. Rajaratnam altered his approach, depending on the person or the situation. He could be direct at times, demanding information from his sources. He could also be solicitous, such as calling to check in with an informant after she underwent an operation. He fed the needs of those in his orbit who could be helpful to him, whether with money, tips or friendship.

In his soft-spoken manner, shaped by his years at secondary school and college in England, Mr. Rajaratnam alternately prodded, chided, ridiculed and flattered his sources. Above all, he was a good listener, saying little as those on the other end of the phone, eager to impress the hedge fund titan, kept talking.

“Getting information that others didn’t have was very valuable,” said a prosecutor during the trial. “It meant the defendant knew tomorrow’s news today, and it meant big money.”

The Good Soldier

Raj Rajaratnam loved to hire people like Adam Smith. With two Harvard degrees and a three-year stint as a Morgan Stanley banker, Mr. Smith impressed his colleagues with a tireless work ethic and detailed knowledge of the semiconductor industry.

Mr. Smith impressed his boss in other ways. From almost the moment he joined Galleon, Mr. Smith routinely trafficked in illegal stock tips from corporate insiders, and shared that information with Mr. Rajaratnam, he later said. Mr. Smith pleaded guilty in January and testified against Mr. Rajaratnam.

“Why did you do it?” asked a prosecutor during the trial.

“I was getting an edge on a company,” said Mr. Smith, 38, central casting’s idea of a banker, with close-cropped hair, wire-rimmed glasses and Hermès tie. “My motivation was to improve the profitability of my firm and to help Raj.”

His clinical answer betrayed a culture inside Galleon that conducted rigorous stock research but also, at least at the top of the fund, relentlessly dug for inside information. Combining the two — legitimate research with illicit tips — was known within Galleon as “having two torpedoes in the water,” Mr. Smith said. “If one of them misses, the other is likely to hit.”

Mr. Smith preferred the fast-paced, aggressive environment of a hedge fund trading floor to investment banking. In an anniversary report for his Harvard Business School class, he wrote that Galleon was “the first job I’ve truly loved, and I find the challenge of the stock market exhilarating.”

He approached his job like a dogged investigative journalist, albeit a very highly paid one, traveling the world to develop sources and pump them for corporate secrets. He forged a relationship with an Intel employee in Arizona who provided Mr. Smith with the company’s confidential financial data. He flew regularly to Taiwan, where he made contacts with technology executives who leaked their companies’ secret revenue numbers.

Mr. Smith also stayed close to his former Morgan Stanley colleagues.

In 2005 he traveled to Laguna Beach, Calif., for the bank’s annual technology industry conference. There an old colleague told him about Integrated Device Technology’s planned acquisition of Integrated Circuit Systems.

He e-mailed Mr. Rajaratnam about the tip with the subject line “the two eyes” — code for the two companies. When the companies announced the deal in June 2005 — bringing Mr. Rajaratnam nearly $3 million in profit, according to prosecutors — Mr. Smith said he felt a tinge of regret.

“I remember after the announcement having a sinking feeling in my stomach that this might be a problem,” Mr. Smith testified.

But, he added, “no one spoke to me about it so I moved on.”

The day after Mr. Rajaratnam’s arrest in October 2009, Mr. Smith left his apartment on Gramercy Park, where he lived with his wife and two young boys, and drove to his country house in upstate New York. There, he dumped his Galleon-issued laptop computer in the trash.

The Sad Sack

“Hey, get me a job with one of your powerful friends, man,” Rajiv Goel, the Intel executive, urged Mr. Rajaratnam. “I’m tired of this company.”

The request, steeped in equal parts insecurity and flattery, was textbook Goel.

Some 30 years after they met at Wharton, Mr. Goel and Mr. Rajaratnam found themselves in vastly different places. Mr. Goel was a dissatisfied midlevel manager in need of money and affirmation. Mr. Rajaratnam was a hedge fund titan.

Mr. Goel, perennially suffering bad luck, whether dealing with a damaged car or combating a rat infestation in his new home, seemed to walk through life with a cloud over his head. But his chummy relationship with his billionaire friend was a bright spot.

Secretly recorded conversations reveal a warm friendship: the men vacationed together with their families and joked easily with each other.

Conversations with Mr. Rajaratnam swerved from transactional to personal and back — one moment discussing a trip to Philadelphia for a business school reunion and the next Intel’s corporate secrets.

Mr. Goel gave his friend advance word of Intel’s earnings results and previewed a $1 billion investment the chip maker planned to make in a large wireless joint venture.

“He was a good man to me,” said Mr. Goel, who pleaded guilty and took the stand on behalf of the government. “I was a good pal, a good person to him, so I gave him the information.”

Still, he worried about passing tips to Mr. Rajaratnam, though not for fear of being caught.

“I was afraid that if it turned out to be wrong, it would have a bearing on the friendship,” he said.

It was a friendship with financial benefits. Mr. Rajaratnam supported Mr. Goel financially in a number of ways. He lent or gave Mr. Goel a total of $600,000 to help him buy a home and care for his sick father.

Mr. Goel also asked Mr. Rajaratnam to help him make money in the stock market. All told, Mr. Rajaratnam earned about $750,000 for him by trading on inside information in Mr. Goel’s account at Schwab.

Mr. Goel constantly sought the approval of his more successful friend.

On one call he boasted to Mr. Rajaratnam about an award he was receiving inside Intel and asked if Mr. Rajaratnam would read the write-up that won him the honor.

When Mr. Rajaratnam at first appeared uninterested, Mr. Goel seemed deflated.

“Does it always have to benefit you?” he asked.

The Hedge Fund Temptress

John Marshall Mantel for The New York TimesDanielle Chiesi

Her platinum blond locks and bold manner turned heads in the tech world and on Wall Street.

Danielle Chiesi, a former beauty queen, was well aware of that attention, and used it to her advantage in the ultra-competitive world of hedge funds, where she plied her trade at New Castle Partners. And just as Mr. Rajaratnam worked his extensive network of South Asian contacts, Ms. Chiesi found her sexuality offered an edge in the male-dominated world of finance.

“I just got a call from my guy,” she told Mr. Rajaratnam in a July 2008 call. “I played him like a finely tuned piano.”

The company under discussion, Akamai, was going to do worse than the market expected, offering a potential windfall for her and Mr. Rajaratnam. When asked by the presiding judge in Mr. Rajaratnam’s trial whether there was a physical relationship between Ms. Chiesi and her Akamai source, a prosecutor demurred.

Ms. Chiesi, who pleaded guilty to crimes related to insider trading but did not testify during the trial, had an affair with Robert Moffatt, a former executive at I.B.M. who is serving jail time after admitting to passing confidential information to Ms. Chiesi. She also had an affair with her boss, Mark Kurland, who also pleaded guilty to insider trading.

Squeezing secret information from corporate insiders excited Ms. Chiesi.

“It’s a conquest,” she told Mr. Rajaratnam on a conversation secretly recorded by the government. “It’s mentally fabulous for me.”

Ms. Chiesi met Mr. Rajaratnam in 2007 at a Wall Street conference and became fast friends. Secretly taped conversations in 2008 feature conversations littered with expletives, breathless market talk and Ms. Chiesi referring to Mr. Rajaratnam as “baby” and signing off with “I love you.”

Mr. Rajaratnam was solicitous of Ms. Chiesi, once calling her just to check in after she had a shoulder operation in the midst of the financial crisis.

“Like how does he even remember I was having surgery? We’re not even friends like that,” she told someone at the time of the call.

Mr. Rajaratnam made it clear to Ms. Chiesi that their trading of corporate secrets should be kept strictly between them. “Radio silence,” he said during one call. During another, Mr. Rajaratnam told her to tell no one about their conversations.

“Not even your little boyfriends, you know?” he said.

The Consultant

Mr. Kumar earned several million dollars a year as a senior executive at McKinsey. He had a grueling work schedule, traveling some 30,000 miles a month, consulting for corporate clients across the globe.

In 2003, Mr. Rajaratnam, who was fast on his way to becoming a billionaire, told his business school classmate that he was underpaid.

“You work hard, travel a lot; people made fortunes while you were away and you deserve more,” he said he was told by Mr. Rajaratnam.

Mr. Kumar would later depict himself as a reluctant felon, initially rejecting Mr. Rajaratnam’s offer. But after they devised an elaborate scheme to hide the payments — opening a Swiss bank account and then transferring funds from it into a Galleon account in the name of Mr. Kumar’s housekeeper — he began moonlighting as a private consultant to Mr. Rajaratnam.

At first, Mr. Rajaratnam asked Mr. Kumar general “big picture” questions about the technology industry but soon became “quite specific,” pressing him for details about individual companies, Mr. Kumar said.

“Mr. Rajaratnam kept asking for that information, and I felt that I owed him something, given how much money he was paying me,” he said.

After Mr. Rajaratnam told Mr. Kumar that his insights were not detailed enough and had little value to him, he suggested an alternative arrangement where they would share trading profits when Mr. Kumar’s tips made money. Mr. Kumar rejected this proposal, preferring a straight-up fee similar to how he was paid for his work at McKinsey.

“I was a consultant at heart,” Mr. Kumar testified. “That seemed like an even bigger crime to me.”

In 2006, Mr. Kumar agreed to another compensation scheme: Mr. Rajaratnam would pay him a year-end bonus based on his annual performance. Mr. Kumar proved his worth that year, providing him with details about secret merger negotiations between Advanced Micro Devices and ATI Technologies.

When the companies announced the deal in July 2006, Mr. Kumar got a call from Mr. Rajaratnam. “That was fantastic,” he said. “We’re all cheering you at the office right now. You’re a star. You’re a hero.”

Mr. Kumar’s tip about the deal helped Mr. Rajaratnam generate about $23 million in profit buying ATI stock, his single largest illegal gain.

In December, Mr. Rajaratnam told Mr. Kumar that Galleon was paying out big year-end bonuses. “I want to give you $1 million,” Mr. Rajaratnam said.

“I almost fell off my chair,” Mr. Kumar testified.

In the video below, DealBook’s Peter Lattman and Azam Ahmed discuss the impact of Raj Rajaratnam’s conviction on 14 counts of securities fraud and conspiracy.

Article source: http://feeds.nytimes.com/click.phdo?i=ffd90ab1d06f09eb2a7f2ea2635a27a6

Filed Under: Business News Tagged With: hedge fund manager, mckinsey company, tipsters

High & Low Finance: A Case That Got a Head Start on the Crime

May 11, 2011 by NewsMaker Leave a Comment

With insider trading, the answer until now was always simple: the crime came first. But the case against Raj Rajaratnam, the hedge fund manager who was convicted by a federal court jury on Wednesday, stemmed from an investigation that began well before the crimes were committed.

And that made all the difference.

In normal insider trading cases, whether the ones involving someone’s brother-in-law or the celebrated one that brought down Ivan Boesky a generation ago, the investigation started only after someone noticed suspicious trading, like the purchase of a stock just before a takeover offer was announced or the short sale of the stock just before bad earnings news was released.

Once the investigation began, the Securities and Exchange Commission could find out who made the trades, and could ask why they chose to make the trades in question. It could also search for a source who might have leaked the “material nonpublic information,” to use the legal term for inside information.

That investigative technique often failed to find proof, even if the investigators were convinced the law had been broken. It was more likely to work with small fish than with whales. If the trader in question had never bought options before and then made a killing by purchasing call options just before a merger was announced, the investigators would be virtually certain there had been a leak.

If it turned out that the chief financial officer of the company being acquired was also a neighbor of the lucky investor, and that phone records showed they had talked just before the trade was made, the case was clear. In many cases, either leaker or leakee would admit what had happened, and often identify others who had shared in the tip.

But that technique is all but useless if the suspect is a hedge fund manager like Mr. Rajaratnam. His firm made dozens, if not hundreds, of trades every day. It had a bevy of analysts and access to all the research by Wall Street firms.

If a trade were somehow questioned, the firm could come up with any number of reasonable-sounding explanations, as Mr. Rajaratnam’s lawyer, John M. Dowd, did in the case that ended in his conviction.

But those explanations sounded pretty lame when stacked up against the audio tape recordings of conversations in which corporate insiders gave confidential information to Mr. Rajaratnam.

Those tapes exist only because the Justice Department got involved in the investigation at the beginning. Presumably, it had reason to believe that insider trading was happening, and that persuaded a federal judge to approve wiretaps.

As a result, the F.B.I. could listen in as the information was provided just before trades were made. And they could hear Mr. Rajaratnam discuss ways to throw off a normal insider trading investigation. He suggested sending choreographed e-mails with fake reasons for a trade. He recommended trading in and out of a stock that was being accumulated because of inside information.

It seems likely that Mr. Rajaratnam had used just such tactics in the past to explain away trades that had aroused suspicion. But hearing him describe them turned a defense into a virtual confession.

Those tapes “showed that the defendant knew what he was doing was not only wrong, but illegal,” said a prosecutor, Reed M. Brodsky, in closing arguments to the jury.

Insider trading was a common practice at Galleon. There were numerous leakers, and they came from the cream of American business — from insiders at major corporations like Intel and Goldman Sachs and from McKinsey, perhaps the most prestigious management consulting firm. Chief executives of smaller firms provided Mr. Rajaratnam inside information about their companies, and profited because they were allowed to invest in his funds.

Galleon ended up sounding like a criminal enterprise, where illegal information was bought through elaborate chains aimed at concealing the source of the money. Hedge fund investments were made in the name of a housekeeper, and money was transferred overseas and back merely to cover up the trail.

Article source: http://www.nytimes.com/2011/05/12/business/12norris.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: hedge fund manager, investigative technique, securities and exchange