Galleon Tip-Seeking on Intel Known to Prosecutors Since 2001

Galleon Tip-Seeking on Intel Known to Prosecutors Since 2001


Oct. 24 (Bloomberg) -- Galleon Group LLC, the hedge fund firm at the center of a $20 million insider trading prosecution, came to the attention of prosecutors by 2001 for allegedly soliciting internal data on Silicon Valley companies.

That year the government charged tipster Roomy Khan, a former Intel Corp. employee, with passing nonpublic information about the chipmaker’s backlog and billing reports, product pricing and sales to the Manhattan-based fund in 1998, according to a criminal complaint filed in federal court in San Jose, California in February 2001.

An unidentified representative of Galleon Management Inc. sought the information from Khan, according to the document. In March 1998, Khan faxed documents from Intel’s Santa Clara, California, offices to a machine at Galleon, prosecutors said in the complaint. Khan pleaded guilty to wire fraud in 2001.

Raj Rajaratnam, Galleon Group’s co-founder, was charged with insider trading on Oct. 16, 2009.

“It’s surprising that the government would only go after one side of the case” in 2001, Peter J. Henning, a professor at Wayne State University Law School, said in an interview. He said that, given Khan’s conviction, the government would have been expected “to pay a lot more attention to Galleon since 2001 -- and on the flip side you’d expect Galleon to be much more careful.”

When a tipster is charged, the government normally moves quickly to go after the recipient of the inside information, Henning said.

Khan Informant

Information provided by Khan was central to the investigation that led to the arrests of billionaire Rajaratnam, an Intel unit executive and four others in the alleged insider- trading scheme, according to a person familiar with the probe, who asked not to be identified because Khan’s name wasn’t disclosed by the government.

Rajaratnam was charged in federal court in New York with Rajiv Goel, a director at Intel Capital, and former directors at a Bear Stearns Cos. hedge fund, in what prosecutors have called the biggest-ever insider trading case involving hedge funds. Rajaratnam also was sued by the U.S. Securities and Exchange Commission.

According to prosecutors who used wiretaps of Rajaratnam to build their case, tips to the hedge fund manager came from insiders and others at hedge funds, investor relations firms, and companies including Intel, International Business Machines Corp., McKinsey & Co., and companies whose shares were traded in the scheme.

Rajaratnam

Rajaratnam has said he is innocent. His lawyer, Jim Walden, declined to comment yesterday. Chuck Mulloy, an Intel spokesman, also declined to comment.

Rebekah Carmichael, a spokeswoman for U.S. Attorney Preet Bharara in New York, and Jack Gillund, a spokesman for the U.S. Attorney’s office in San Francisco, declined to comment.

Galleon Management didn’t hold Intel shares as of March 31, 1998, according to the firm’s regulatory filings at the time. By the end of June that year, it accumulated a $39 million stake in Intel, the firm’s largest holding in any single company, the filings show.

Over the next nine months, Intel’s stock climbed 60 percent as the chipmaker’s sales and revenue surged on demand for computers in the dot-com boom. Regulatory filings show Galleon reduced its stake to $20.7 million by the end of 1998, and no longer held Intel stock at the end of March 1999.

Guilty Plea

Khan pleaded guilty in 2001 to one count of wire fraud and was sentenced the following year to six months of home detention, fined $30,000 and ordered to pay $120,000 in restitution, said Joseph Schadler, a spokesman for the Federal Bureau of Investigation, in a phone interview yesterday. The maximum penalty for wire fraud is 20 years in prison and a $250,000 fine. Records of Khan’s criminal case are under seal in federal court in San Jose.

Khan, identified by an Oct. 16 SEC complaint as “Tipper A,” is a hedge-fund manager who worked for Galleon in the 1990s and sought to rejoin Rajaratnam in late 2005 when she faced financial difficulties, according to that agency. Khan is identified in the criminal case against Rajaratnam as “CW,” for cooperating witness.

The cooperating witness began helping the FBI in November 2007 in its inside trading probe in the hope of receiving a reduced sentence, according to court documents. The witness used inside information to trade securities and had tipped Rajaratnam since 2006, prosecutors said. The person helped federal investigators by “making consensual recordings of four telephone conversations” with Rajaratnam, according to court papers. The witness agreed to plead guilty to charges of conspiracy and securities fraud.

Khan, who in May sold her house in Atherton, California, couldn’t be located for comment.

Possible Explanation

One possible explanation of why nine years passed before someone at Galleon was charged is that prosecutors and the SEC couldn’t demonstrate that the firm traded on the specific information that Khan provided, Henning said. He said it’s also possible that federal securities regulators couldn’t show the information would be material, or something that investors would want to know when making decisions.

The 2001 conviction may hurt the government’s insider trading case against Rajaratnam, Henning said, because it raises questions about her reliability and trustworthiness. Those questions in turn mean the government will have to rely more on documentary evidence and wiretaps, he said.

“Having a prior conviction, that’s fodder for the defense,” Henning said. “They may not use her as a witness, she may be too tainted.”

The case is U.S. v. Kahn, 01-20029, U.S. District Court, Northern District of California (San Jose).

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