FBI Uncovers ‘The Largest Hedge Fund Insider Trading Case in History’

Federal agents arrested and charged six key players in what the FBI has called the largest hedge fund insider trading case in history. The arrests, made early Friday, targeted high level executives at firms such as IBM and Intel, as well as hedge funds and consulting companies, the highest profile of which was Sri Lankan billionaire hedge fund manager Raj Rajaratnam and his New York-based hedge fund advisory firm Galleon Management LP. According to the Securities and Exchange Commission (SEC), which also filed charges against the sextet, Rajaratnam utilized his extensive contacts in the business world to get nonpublic information on corporate activity for companies such as Intel, Google and Sun Microsystems, which he then used to make trades on behalf of his hedge fund, generating roughly $25 million for him and his associates.

One of the more interesting aspects of this case is that it is the first time court-authorized wiretaps, traditionally used to combat mobsters and terrorists, were used to investigate insider trading on Wall Street. Federal agents intercepted Rajaratnam’s phone calls over the course of several months, finding multiple instances of insider information being used to enrich himself and his co-conspirators. For example, in July 2008, the FBI overheard him receiving information from Daniel Chiesi, a portfolio manager with New Castle Funds (who was among those arrested and charged) about information he got from an executive at tech company Akamai. Federal agents claim to have overheard the following conversation:

"Akamai.... I'm trading it tomorrow.... They're gonna guide down. I just got a call from my guy.... I was talking about the family and everything, and then he said people think it's gonna go to 25 [dollars per share]. They print on Wednesday," said Chiesi.

To which Rajaratnam said, "You got a few more days. Friday, Monday...."

Chiesi replied, "Just keep shorting every day. We got a lot of days...."

Perhaps the greatest conversational gem to come out of this affair, however, came during an August conversation between Chiesi and an unidentified co-conspirator about recent reorganizations at chip maker AMD. In order to impress upon the co-conspirator the importance of keeping quiet, the portfolio manager acknowledges that what they’re all doing is illegal. The gods of irony, fickle and cruel, must have been greatly amused to overhear the following conversation, recorded August 28:

"You just gotta trust me on this. Here's how scared I am about what I'm gonna tell you on AMD," said Chiesi.

The co-conspirator then asked when the announcement would take place, and Chiesi replied, "September,” before adding "I swear to you in front of God... You put me in jail if you talk." Later, he said, "I'm dead if this leaks. I really am... and my career is over. I'll be like Martha [expletive] Stewart."

In addition to Rajaratnam, those charged by the SEC also include:

Danielle Chiesi of New York, N.Y. — a portfolio manager at New Castle Funds.

Rajiv Goel of Los Altos, Calif. — a managing director at Intel Capital, an Intel subsidiary.

Anil Kumar of Saratoga, Calif. — a director at McKinsey & Company.

Mark Kurland of Mount Kisco, N.Y. — a Senior Managing Director and General Partner at New Castle.

and

Robert Moffat of Ridgefield, Conn. — a senior vice president at IBM.