Recent Enforcement Highlights Lauren M. Gambier, Kiersten A. Fletcher, and Ruti Smithline

• Pages: 57-104

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CHAPTER 5

Recent Enforcement Highlights

Lauren M. Gambier, Kiersten A. Fletcher,

andRuti Smithline

1. Operation Perfect Hedge

In the early 2000s, the New York Field Office of the Federal Bureau of

Investigation (FBI) launched Operation Perfect Hedge, a nationwide insider

trading investigation of a size not seen since the days of Ivan Boesky and

Dennis Levine, and the largest insider trading investigation ever relating to

hedge funds.1 According to FBI agents David Chaves and Patrick Carroll,

the massive investigation was launched in response to receiving intelligence

that “a surge in profits at hedge funds might be the result of an epidemic

of insider trading.”2 Operation Perfect Hedge made a household name of

Raj Rajaratnam and his hedge fund Galleon Management, LP and led to

Rajaratnam’s conviction and imprisonment. Operation Perfect Hedge also

entangled many well-respected financial and consulting firms, including

Primary Global Research, SAC Capital, and others.

A remarkable aspect of Operation Perfect Hedge was the intertwining

webs of trading conspiracies uncovered across various industries, countries,

and individuals. As one FBI agent noted, “That’s what was so amazing,

that everyone who started cooperating seemed to know everyone else. . . .

1

Patricia Hurtado, FBI Pulls Off “Perfect Hedge” to Nab New Insider Trading Class,

Bloomberg (Dec. 20, 2011), http://www.bloomberg.com/news/2011-12-20/fbi-pulls-off

-perfect-hedge-to-nab-new-insider-trading-class.html.

2 Id.

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58 CHAPTER  Recent Enforcement Highlights

[W]e began to see that, as big as this industry is, it’s also small, at least the

core of people who were engaged in this conduct.”3

A. Galleon and Raj Rajaratnam

Insider trading—somewhat forgotten by the public and media since the

scandals of the 1980s—received renewed attention when news of investiga-

tions of the Galleon Group and related entities and persons broke in October

2009. In United States v. Rajaratnam

4

and the parallel Securities and Exchange

Commission (SEC) enforcement action, SEC v. Galleon Management, LP,

5

the government alleged widespread insider trading at several hedge funds,

including Galleon Management, LP—a formerly multibillion-dollar hedge

fund founded and controlled by Raj Rajaratnam—New Castle Funds LLC,

Spherix Capital LLC, and S2 Capital Management, LP. The government

alleged that through a complicated web of overlapping relationships and

information sharing, the scheme generated more than $49 million in illicit

profits or avoided losses.

The trial of Rajaratnam was, at its time, called by many commenta-

tors the biggest trial in the history of insider trading.6 The trial allowed

a rare inside glimpse into the operations of a high-powered hedge fund

that made illicit profits of more than $50 million. The corporate insiders

who provided the material non-public information on which Rajaratnam

traded were elite professionals associated with blue-chip companies such

as Intel, IBM, McKinsey, and Goldman Sachs.7 According to prosecutors,

3 Id.

4 United States v. Rajaratnam, No. 09-Cr-1184 (RJH), 2010 U.S. Dist. LEXIS 143175

(S.D.N.Y. Nov. 29, 2010).

5 SEC v. Galleon Mgm’t, LP, 683 F. Supp. 2d 316 (S.D.N.Y. 2010).

6 David Glovin, Patricia Hurtado, & Bob Van Voris, Rajaratnam Guilty on All Counts in

U.S. Insider-Trading Case, Bloomberg (May 11, 2011), http://www.bloomberg.com/news

/articles/2011-05-11/rajaratnam-is-found-guilty-of-all-counts-in-galleon-insider-trading-trial.

7 In addition to Rajaratnam, the following individuals and entities were charged by the

DOJ and/or the SEC in connection with the Galleon web: Steven Fortuna, Roomy Khan,

David Slaine, Ali Far, Richard Choo-Beng Lee, Gautham Shankar, Franz Tudor, Thomas

Hardin, Brien Santarlas, Danielle Chiesi, Mark Kurland, Rajiv Goel, Robert Moffat, Anil

Kumar, David Plate, Deep Shah, Ali Hariri, Zvi Goffer, Craig Drimal, Michael Kimelman,

Arthur Cutillo, Jason Goldfarb, Emanuel Goffer, Adam Smith, Michael Cardillo, Shammara

Hussain, Sunil Bhalla, Robert Feinblatt, Jeffrey Yokuty, Rajat Gupta, Galleon Management

LP, S2 Capital Management, Newcastle Funds LLC, Spherix Capital LLC, Schottenfeld

Group, and Trivium Capital Management LLC.

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CHAPTER  Recent Enforcement Highlights 59

what made Rajaratnam stand out as a profitable investor was his deep set

of contacts with industry insiders. As one of the prosecutors argued to the

jury, “Getting information that others didn’t have was very valuable. It meant

the defendant knew tomorrow’s news today, and it meant big money.”8

In the five-week government case, prosecutors called eighteen witnesses.

Jurors listened to forty-fivesecretly recorded telephone conversations

between Rajaratnam and his alleged accomplices (whittled down from 18,000

calls the government had wiretapped during Operation Perfect Hedge).

In one of the calls, for example, Rajaratnam was heard telling a Galleon

employee that he “heard yesterday from somebody who’s on the board at

Goldman Sachs that they are going to lose $2 per share.... The Street has

them making $2.50.”9 Jurors also heard from three cooperating witnesses:

(1) Anil Kumar, a former McKinsey consultant whom the government

said Rajaratnam paid $500,000 a year in exchange for inside information

on publicly traded companies; (2) Adam Smith, a former Galleon trader

who described the inner workings of Galleon and testified that legitimate

information and illicit tips were known within Galleon as “having two tor-

pedoes in the water; if one misses, the other is likely to hit;”10 and (3)Rajiv

Goel, a mid-level Intel manager who had been Rajaratnam’s classmate at

the Wharton Business School and whom the government alleged netted

more than $1million by providing Rajaratnam with Intel’s corporate secrets.

All three cooperating witnesses had entered guilty pleas prior to the trial.

Throughout the case, Rajaratnam’s lawyers maintained that he had “only

traded stocks based on public information, expert research and analysis

conducted by Galleon.”11 The defense attacked the insider trading charges

on the basis that the information that Rajaratnam and his alleged accom-

plices swapped in the taped conversations was information that was widely

known. Through an expert witness, Rajaratnam explained the practices

of sophisticated investors and how confidential information can leak out

of companies without a misappropriation. Rajaratnam’s lawyers made the

8 David Glovin, etal., Rajaratnam “Corrupted” Friends, Employees, Prosecutor Says,

Bloomberg (Apr. 20, 2011), http://www.bloomberg.com/news/2011-04-20/rajaratnam

-corrupted-friends-employees-prosecutor-tells-insider-jury.html

9 Peter Lattman, Prosecution Rests Its Case in Galleon Trial, N.Y. Times DealBook (Apr. 6, 2011),

http://dealbook.nytimes.com/2011/04/06/prosecution-rests-its-case-in-the-galleon-trial/.

10 Basil Katz, Rajaratnam Manager Testifies He Gave His Boss Tips, Reuters (Mar. 29, 2011),

http://www.reuters.com/assets/print?aid=USN2928346420110329.

11 Lattman, supra note 8.

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