In 1997, Raj Rajaratnam founded the Galleon Group, which would go on to become one of the largest hedge fund management firms in the world. Rajaratnam was a former lending officer at Chase Manhattan Bank and equity research analyst at Needham & Co., where he rose through the ranks to become president in 1991. He found success by investing primarily in healthcare and technology companies throughout the 1980s and 1990s. By the time he founded Galleon in 1997, he had developed a savvy reputation for finding promising technology investments and being on the cutting edge. Galleon invested rapidly in high volumes, and at its peak in the 2000s, managed over $7 billion. By 2009, Rajaratnam had a net worth of more than $1 billion. But by the end of 2009, Galleon closed its doors.
Rajaratnam was the subject of an insider trading investigation by the U.S. federal government. In 2009, he was arrested by the Federal Bureau of Investigation and charged with 14 counts of securities fraud and conspiracy. Electronic records and wiretapped conversations exposed numerous communications he had with insiders at companies including Intel, Advanced Micro Devices, Clearwire, Google, Hilton, Akamai Technologies, and Goldman Sachs. These communications included insider information which Rajaratnam used to trade these and other companies’ stocks. In advance of Goldman Sachs’ earnings announcement, for example, Rajaratnam was recorded telling an employee, “I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share… So what he was telling me was that, uh, Goldman, the quarter’s pretty bad.” In another conversation, a tipster told Rajaratnam, “So I think, uh, you can now just buy,” referring to an upcoming deal.
Lawyers for Rajaratnam argued that all of his trading was based on publicly available information, including newspaper articles, analyst reports, and company news releases. Galleon had been known for extensive research into companies’ prospects as a part of its success and edge over other investment firms. Lead lawyer John Down said Rajaratnam’s success was from “shoe-leather research, diligence and hard work.” The defense presented evidence, for example, of 51 news articles and six analyst reports that speculated about a potential merger of Advanced Micro Devices and ATI Technologies. This was one deal for which prosecutors claimed Rajaratnam received insider information. The prosecution agreed that Galleon regularly performed legitimate research but argued that its employees often violated securities laws, as well. Prosecutor Reed Brodsky stated, “[Rajaratnam] knew the rules, but he did not care… Cheating became part of his business model.” A government investigation estimated that via insider trading, Galleon avoided losses or generated profits of $72 million in total.
In 2011, Rajaratnam was found guilty on all 14 counts of conspiracy and securities fraud. He was ordered to pay a fine of $10 million, forfeit $53 million, and sentenced to 11 years in prison. This was the longest prison term for insider trading at that time. At the sentencing, U.S. District Judge Richard Howell said that Rajaratnam’s crimes “reflect a virus in our business culture that needs to be eradicated.” Manhattan U.S. Attorney Preet Bharara expressed hope that this would be a wake-up call. He stated, “Privileged professionals do not get a free pass to pursue profit through corrupt means.”