Sri Lanka politics and commentary

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Wednesday, October 21, 2009

Galleon Hedge Fund Scandal: $4 Million For Kenny Rogers On Auto-Repeat, Only $5 Million for Tsunami Rehabilitation

Research assistance by Claire Schneiderman

The story of Galleon Group, the hedge fund at the heart of the biggest insider-trading scandal in decades, has plenty of colorful characters from a billionaire whose charitable donations ended up aiding rebels in Sri Lanka to a foul-mouthed ex-Bear Stearns executive who befriended a mild-mannered IBM vice president.

Here's a guide to the scandal's most colorful quotes and anecdotes:

- Leon Shaulov, a loudmouth senior trader at Galleon, once turned on a colleague, Gary Rosenbach, in front of the rest of the staff, screaming: "You're a disease, you're a jinx."

- Galleon founder Raj Rajaratnam once "paid $4 million to have Kenny Rogers come to a birthday party at his house and sing his favorite song, 'The Gambler,' over and over again. Kenny refused to go on after a dozen times."

- Anyone who arrived late at Galleon's morning meeting of 70 analysts, portfolio managers and traders was fined $25.

Straight from the indictment of co-defendants Danielle Chiesi and Mark Kurland, both from the hedge fund New Castle, and Robert Moffat, the IBM officer who provided them with information regarding AMD, IBC, and Sun Microsystems, come some incredibly insightful quotes caught on government wiretaps:

- Chiesi to Kurland, on whether to call an Akamai executive when they believed Akamai would announce quarterly earnings earlier than expected, "Do you want me to call [the Akamai Executive] up? It's a pretty fucking scary thing to do." Kurland replied, "Call him... Let him talk."
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- Following this conversation, an Akamai executive called Chiesi to say that he was "gonna come visit you in New York and I'm gonna give you a present. But it has to be face to face..." Later, he said, "Danielle, I have a major present for you." Chiesi asked what he was talking about, and the Akamai executive replied, "Information." Chiesi said, "Well that, that is a great present."

- Perhaps Chiesi knew that she would be indicted in the first case of insider trading where the feds used wiretapping. When Kurland called Chiesi at the end of August, 2008, Chiesi said that she was going to "get a new cell phone and talk to [the AMD executive from there... I know I'm paranoid." Kurland replied, "Alright, well don't keep talking about it on the phone. I'll take care of it alright."

- Regarding whether Chiesi and Rajaratnam would have bought AMD stock if they weren't in on the trading, Chiesi asked, "If the two of us weren't close to the company as we are, would you be long the stock?" Rajaratnam replied, "Yeah, no. I wouldn't." Chiesi said that she "wouldn't of touch[ed] it with a fucking 10-foot pole."

- In what seems a clear sign that Rajaratnam and Chiesi were aware of potential wrongdoing, during a discussion of AMD stock, which both of them were buying, Chiesi said: "I don't want anybody else to make money on this but us, 'cuz I don't want to get in trouble for a lot of reasons..."

- A conversation between Chiesi and a co-conspirator was even more telling: the co-conspirator asked when the announcement would take place regarding an AMD reorganization, Chiesi replied, "September... I swear to you in front of God... You put me in jail if you talk." Later, Chiesi said, "I'm dead if this leaks. I really am... and my career is over. I'll be like Martha fucking Stewart."

Raj Rajaratnam: Known for Speed, Smarts-Wall Street Journal


Hedge-fund manager Raj Rajaratnam, who is accused of running a major insider-trading scheme, was known on Wall Street for his rapid-fire trading and in Silicon Valley for his knowledge of the technology industry.

His favorite quote, he told a magazine, came from Intel founder Andrew Grove: "Only the paranoid survive."

The Sri Lankan-born founder of Galleon Management LP churned out impressive gains since the firm's founding in 1997, making the 52-year-old Mr. Rajaratnam a billionaire. He was respected for his charitable work and willingness to pick up the phone and answer calls from even his smaller investors.

"It's quite shocking to me," said Mike Napoli of Absolute Return Group, a Los Angeles firm that invests in hedge funds and met with Mr. Rajaratnam in the past, though he didn't invest in Galleon. "There were no clues this could happen, he gathered a collection of trading talent with a lot of integrity and he is a star -- and his star hadn't fallen, he was highly regarded."

Mr. Rajaratnam had one run-in with regulators in the past, agreeing to pay a fine of nearly $2 million in 2005 after the Securities and Exchange Commission alleged the improper short-selling of 17 stocks just before the companies sold additional shares. But Galleon also was one of the minority of hedge funds that agreed to register with the SEC, which then regularly audited it.

Mr. Rajaratnam boasted to at least one client that the SEC specifically investigated whether Galleon had been doing any insider trading or other illegal trading and had given the hedge fund a clean bill of health. Galleon employed a chief compliance officer charged with making sure all trading at the firm was done properly, a position that many funds don't have.

Mr. Rajaratnam has three children and lives on Sutton Place, an exclusive street on Manhattan's Upper East Side. He was in Sri Lanka in December 2004 when the tsunami that caused more than 200,000 deaths across Asia hit the island nation. He wasn't near the coast, but the tragedy moved him to pledge $5 million to replace homes destroyed in the flood. After returning home, he organized a fund raiser at the Stone Rose Lounge in New York's Time Warner Center that raised an additional $3 million.

Galleon manages $3.7 billion, according to a company spokesman; it managed as much as $7 billion a few years ago, according to an investor. Mr. Rajaratnam's technology-focused fund, which is accused of committing the improper trading, manages $350 million. The biggest of Galleon's funds is the $1.2 billion Galleon Diversified fund. Until this year, Mr. Rajaratnam recorded annualized returns of 21% for his largest fund. This year, it rose almost 25% through October.

Mr. Rajaratnam was long considered among the top "growth" investors, with a focus on technology and health-care shares, though it expanded into energy, consumer and financial shares. While Mr. Rajaratnam continued to do his own investing in recent years, his firm churned out much of its gains from dozens of fast-moving traders who operated semi-autonomously, using the firm's capital.

Before launching Galleon in 1997, Mr. Rajaratnam was president and chief operating officer of Needham & Co., an investment bank focused on the technology and health-care industries. He started at Needham in 1985 as an analyst in the electronics sector and was promoted two years letter to oversee investment research. From there he kept rising. It was at Needham in 1992 that he started a hedge fund focused on emerging-market securities, becoming its general partner.

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