NEW YORK - Federal investigators plan to charge at least 10 securities professionals with insider trading, some linked to the criminal case against billionaire hedge fund manager Raj Rajaratnam that shook Wall Street last week, people familiar with the matter said yesterday.
The pending crackdown, more than two years in the making and among the biggest undercover operations into insider trading, may yield charges against hedge fund managers and their associates as early as this week, the people said, declining to be identified because the cases aren’t public. Authorities had planned to arrest Rajaratnam this week as part of a broader sweep, expediting it after learning he had bought a plane ticket to travel to London on Friday, one person said.
The case against Rajaratnam, built on recorded conversations within a web of alleged conspirators, offers a glimpse of how US investigators are using more aggressive tactics to identify illegal trades hidden within a blizzard of hedge fund investments. Additional inquiries stem from a secret Securities and Exchange Commission data-mining project set up to pinpoint clusters of people who make similar well-timed stock investments. Some investigations, like the one against Rajaratnam, rely on wiretaps.
“If you’re going to shoot the king, you better shoot to kill,’’ said Bradley Bennett, a law partner at Baker Botts LLP in Washington who formerly focused on insider trading cases as an SEC investigator. “If they’re going to take on a billionaire, they need to have the strongest possible cases. The defendant’s own words are the strongest possible evidence.’’
SEC spokesman John Heine declined to comment, as did Alejandro Miyar, a spokesman for the Justice Department.
Rajaratnam, who founded the Galleon Group in 1997, was arrested Friday with five alleged conspirators in what prosecutors called the biggest insider trading ring targeting a hedge fund. Prosecutors said he and his firm reaped as much as $18 million by investing on tips from a hedge fund, a credit rating firm, and employees within companies including Intel Capital, McKinsey & Co., and IBM Corp.
Rajaratnam, born in Sri Lanka’s capital of Colombo, has a net worth of $1.3 billion, making him the 559th richest person in the world, according to Forbes Magazine. In the early years of this decade, Galleon ranked among the world’s 10 largest hedge funds, managing $7 billion at its peak in 2008.
Rajaratnam hasn’t yet entered a plea. His lawyer, Jim Walden, said last week that prosecutors are misconstruing the evidence and that the case isn’t as strong as they allege.
US senators have pressed regulators to more aggressively scrutinize hedge funds. Some of those concerns were spurred by the SEC’s decision in 2006 to close an insider trading inquiry of Pequot Capital Management Inc., once the world’s biggest hedge fund manager, after investigators said they lacked evidence to bring the case.
The SEC reopened part of the inquiry focusing on whether Pequot abused information from a former Microsoft Corp. employee. In August, Pequot and founder Arthur Samberg, 68, said they may be sued by the agency. Insider trading claims would be “without merit,’’ they said.
The SEC has also expressed concern that hedge funds may engage in insider trading based on information from their own investors. Many cases begin when stock exchanges send the SEC reports on traders who place profitable bets shortly before corporate announcements.
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