Oct. 19 (Bloomberg) -- The U.S. government’s charging of billionaire Galleon Group founder Raj Rajaratnam last week provides rich insider details of usually secret hedge-fund operations, thanks to the use of wiretaps.

The case, focusing on a slice of trades that produced $20 million in alleged profits, provides a snapshot of an alleged network of informants and traders, led by Rajaratnam, 52. His co-conspirators, according to prosecutors, included a McKinsey & Co. consultant, an Intel Corp. treasury manager and Danielle Chiesi, 43, a Bear Stearns Cos. veteran who used expletives as she worried about getting caught.

With the alleged inside help from these people and others, Rajaratnam built a hedge fund that managed $7 billion at its peak before being reduced to $2.6 billion in assets as of March 31. That success was achieved more by guile than genius, said U.S. Securities and Exchange Commission enforcement chief Robert Khuzami, who sued Rajaratnam and the others last week.

“He is not the astute student of company fundamentals or marketplace trends that he is widely thought to be,” Khuzami said at an Oct. 16 press conference. “He is not a master of the universe but rather a master of the Rolodex.”

Rajaratnam’s defense attorney Jim Walden said last week that prosecutors are misconstruing the evidence against his client and that the case isn’t as strong as they allege. Galleon said it was cooperating with the government.

Routine

The wire transcripts laid out in criminal and civil complaints make it appear that trafficking in inside information was a routine way of business for Rajaratnam. The starting point for this case was a 2005 job interview at Manhattan-based Galleon, at which Rajaratnam asked the applicant to name companies where he had an “edge,” -- access to inside information, prosecutors said.

The applicant, who would became the government’s key confidential witness, mentioned Polycom Inc. The witness had gotten advance word from a friend there on the company’s quarterly earnings, according to prosecutors.

The informant wasn’t hired by Galleon. Instead, the witness began feeding Rajaratnam inside information on Pleasanton, California-based Polycom and two other companies, Mountain View, California-based Google Inc. and McLean-based Hilton Hotels Corp. Galleon allegedly turned a $4 million profit on the tip about Blackstone Group LP’s $20 billion buyout of Hilton the day before the announcement. The informant in return received inside information from Rajaratnam on Intel and other companies, according to the complaint.

Danielle Chiesi

The unidentified informant, who has agreed to plead guilty and cooperate, began taping conversations with Rajaratnam, part of the government’s recording of private talks between the hedge-fund manager and his friends. One frequent caller in the group was Chiesi of New Castle Partners, once a Bear Stearns Cos. unit, according to the complaints.

During an Aug. 22, 2008, call, her colleague, Mark Kurland, 60, advised Chiesi to leave the analysis to him and concentrate on gathering more inside intelligence, a transcript shows.

“You know, get more relationships, like Microchip, Akamai,” he said, according to the transcript. “Why don’t you worry about getting the information, don’t worry about the numbers.”

Microchip was a reference to chipmaker Advanced Micro Devices, based in Sunnyvale, California, according to the complaint. Chiesi had cultivated an executive there to provide inside information, prosecutors said. At Akamai Technologies Inc., prosecutors said Chiesi had a family friend who leaked data on the provider of software to make Web sites load faster.

Swapping

A Sept. 9, 2008, call between Chiesi and her contact there illustrates the information-swapping process. After discussing whether Cambridge, Massachusetts-based Akamai would be buying back stock, Chiesi told her source, according to the transcript, “I want you to buy AMD … before the end of the month. Nothing’s gonna happen next week, but the week after … I think I’ve got a big deal.”

The Akamai executive replied, “Okay, okay, good. I really appreciate that.”

On Oct. 10, 2008, the tipster called Chiesi, saying, “I’m gonna come visit you in New York, and I’m gonna give you a present. But it has to be face to face.” She asked what he was talking about, and the Akamai executive replied, “Information.” Chiesi said, according to the transcript. “Well, that is a great present.”

Chiesi both used her Akamai intelligence for New Castle’s trading and passed it on to Rajaratnam, prosecutors said. Sometimes they jousted and jested about who knew more. In a Sept. 23, 2008, call, Rajaratnam gave Chiesi word that he’d received on Advanced Micro Devices’ revenue report for the quarter ending Sept. 30, which would be $1.6 billion.

‘I’m the Best’

“Tell me I’m the best in AMD,” he said, according to the transcripts. “You might know [the AMD executive] or whoever … I wanted to compete with on in your home yard, in your back yard … I must defer to you on IBM.”

“And Akamai, too,” Chiesi said.

“Akamai, too. But AMD? Bring it on, baby.”

Chiesi’s remarks were often salty, according to the wiretaps. On an Aug. 15, 2008, call, she complained that in pursuit of insider tips she’d be meeting another of the accused, Robert Moffat, 53, an IBM Corp. senior vice president “on f-----g Sunday at my mom’s house.”

Insider-Trading Scandals

The wiretaps, which prosecutors said hadn’t previously been used to catch those dealing in inside information, showed Rajaratnam, unlike some others accused of that crime, preferred bartering for confidential intelligence to paying for it.

A source at Market Street Partners, an investor-relations contractor for Google, told the government informant in July 2007 that Google’s second-quarter earnings, to be announced later that month, would disappoint Wall Street, according to the wiretaps. The informant relayed the tip to Rajaratnam, who, through a combination of buying Google put options and short- selling its stock, made an $8 million profit, prosecutors said.

A put option is an agreement that gives the buyer the right to sell a specific quantity of a particular security by a specific date. A short sale involves a security that one does not own and has borrowed in anticipation of making a profit by paying for it after its price has fallen.

The Market Street person stated that she wanted to be paid for future market-moving information. Rajaratnam declined and the source stopped talking, according to the court papers. Six months later, in a Jan. 14, 2008, phone conversation, Rajaratnam asked the go-between if he’d heard anything about Google.

“I told you, that lady won’t speak to me,” the informant said. “Idiot,” Rajaratnam replied, the transcript shows.

An Obsession

Galleon’s chief wasn’t always brilliantly successful. An obsession with Advanced Micro Devices, which began with windfall hopes in June 2008, ended with losses in October 2008, court documents show.

According to the complaints, Anil Kumar, 51, the McKinsey director and a Galleon investor, began consulting that month with AMD. It was considering spinning off its semiconductor operations into a joint venture with the Abu Dhabi government. That would bring a major investment from an Abu Dhabi sovereign wealth fund -- and a likely increase in AMD’s stock price.

On Friday, Aug. 15, the wiretaps show Kumar called to tell Rajaratnam that the parties had “shaken hands and said they’re going ahead with the deal,” which would involve a $6 billion to $8 billion investment. “I think that you can now just buy,” Kumar said.

That day and the following Monday, Galleon bought 5.9 million shares of AMD, at prices from $5.55 per share to $5.75 a share, according to the complaints.

Chiesi, Kurland, Moffett and Kumar all deny the charges, according to their lawyers.

Reliance

Rajaratnam relied on Chiesi of New Castle, which had purchased 199,400 AMD shares at $5.44 a share, to augment his own intelligence about whether the tentative deal was staying on track, the transcripts of their calls show. She had her source at AMD and Moffat at Armonk, New York-based IBM, which was reviewing the transaction because it would have to license its technology to the spinoff company.

She told Rajaratnam, in a July 24 conversation, how she got the latest on Akamai. Chiesi was telling the Akamai executive: “You’re the only person in the family who helps me,” when he did so again, according to the complaint. “By the way, we’re gonna guide down on Wednesday,” he said.

Chiesi brought Rajaratnam both her AMD intelligence and her fears that she would be found out as a tipster.

“If it leaks, I think I’m out of business,” she told him during an Aug. 19 call. “Because who knows IBM? And who’s in bed with AMD? Put Danielle’s name on the f----n’ ticket.”

Fretted

She fretted about their making too big a score on AMD inside information, wondering in an Aug. 27 conversation if regulators would notice her profits if the stock rose 30 percent after the Abu Dhabi deal was announced.

Rajaratnam suggested covering her tracks by trading in and out of the stock while they awaited the deal’s completion. Galleon was continuing to add to its position in AMD, eventually reaching 8 million shares, the complaints state.

“I think you should buy and sell, and buy and sell,” Rajaratnam said, according to the wiretap. He also advised: “Be radio silent. Like, you know, I get sh-t on lots of companies.”

“I’m radio silent,” Chiesi said, the transcripts state.

On Sept. 30, Rajaratnam called Chiesi to tell her the announcement was set.

“The date is October 7,” he said, according to the complaint, and advised her to buy more AMD shares, then sell half before the announcement.

‘Nervous’

Chiesi said she was still “nervous” about being investigated, according to the transcript. “Glad that we talk on a secure line,” she said into the tapped phone. “I appreciate that.”

“I never call you on my cell phone,” Rajaratnam replied, according to the complaint.

AMD shares rose 25% Oct. 7, to $5.27 a share, increasing the value of Galleon’s shares by $9.5 million, according to the SEC suit. Rajaratnam sold 1.3 million shares that day, held the rest, and watched AMD’s stock fall to $3.50 by the end of the month. The general decline of the stock market, as the financial crisis was beginning, had negated his inside “edge.”

That’s the last alleged insider transaction outlined by prosecutors, though not the last entry in the complaint. B.J. Kang, the investigating FBI agent, tells of getting a call from a colleague. In the course of another investigation, his pal had heard that Rajaratnam was suspicious that a former Galleon employee was wearing a “wire.”

Kang also heard from a U.S. Customs and Border Protection official in the wee hours of Oct. 15 that Rajaratnam had bought a ticket to fly from JFK International Airport in New York to London the next day. Before he could, he was arrested that day at 6 a.m., at his Manhattan apartment.

The cases are U.S. v. Rajaratnam, 09-02306, and U.S. v. Chiesi, 09-02307, U.S. District Court for the Southern District of New York (Manhattan).

To contact the reporter on this story: John Helyar in Atlanta at jhelyar@bloomberg.net

Last Updated: October 19, 2009 00:01 EDT