Oct. 20 (Bloomberg) -- The U.S. investigation into alleged insider trading by Galleon Group and technology executives may prompt Silicon Valley companies to clamp down on how employees handle sensitive financial information.

“It’s a wake-up call, if not an extraordinary reminder that they need to make sure their employees understand the rules of insider trading and what they can and can’t talk about,” said Jahan Raissi, former senior counsel in the enforcement division of the U.S. Securities and Exchange Commission. “It’s also a wake-up call that federal prosecutors aren’t going about this as business as usual.”

Prosecutors said Galleon founder Raj Rajaratnam reaped as much as $18 million from investing on tips from a hedge fund, a credit rating firm and executives at International Business Machines Corp. and Intel Corp. The case may lead companies to be more guarded about the information they share with outsiders, said James Post, a professor at Boston University.

Rajaratnam, 52, and the other defendants are charged with using insider information to trade in companies such as Google Inc., Polycom Inc. and Advanced Micro Devices Inc. Last week, prosecutors arrested Rajiv Goel, who worked at Intel Capital as a director in strategic investments, and IBM executive Robert Moffat, who ran the hardware business.

In the case of Google, the most-used Internet search engine, prosecutors said a person at investor relations firm Market Street Partners provided tips about earnings.

‘Chilling Effect’

“It’s going to have an immediate chilling effect on communication between company sources and people in the investment community,” said Post, who co-wrote “Redefining the Corporation,” a study of governance and accountability. “I imagine that general counsels will immediately send out strong reminders -- not to be sharing information that has not been made public.”

Edward Barbini, a spokesman for Armonk, New York-based IBM, said yesterday that Moffat would be placed on temporary leave. Chuck Mulloy, a spokesman for Santa Clara, California-based Intel, said Goel is on administrative leave and the company is investigating.

Jane Penner, a spokeswoman for Mountain View, California- based Google, declined to comment. Calls to Market Street Partners’ office in San Francisco weren’t returned. AMD declined to comment, said Drew Prairie, a spokesman for the Sunnyvale, California-based company.

Federal investigators plan to charge at least 10 securities professionals with insider trading, according to people familiar with the matter.

Tipster Dangers

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.

“This will remind people of insider trading laws and that they need to be careful when talking about sensitive business matters,” said Alan Kalin, a lawyer in corporate and securities matters at Bingham McCutchen LLP in Palo Alto, California. He expects more seminars on “the danger of being a tipster.”

At Polycom, Chief Executive Officer Robert Hagerty sent an e-mail to employees yesterday reminding them of the rules against divulging confidential insider information. The Pleasanton, California-based company makes videoconferencing systems.

‘Robust and Unambiguous’

“We do have a very robust and unambiguous insider trading policy that all employees get,” Polycom Chief Financial Officer Michael Kourey said in an interview. “We will look at our policy to see if there are even further enhancements we can make.”

AMD, the world’s second-largest maker of personal-computer processors, consistently reminds employees to manage confidential information properly, spokesman Prairie said. He didn’t elaborate. Intel employees who deal with material information receive training on at least an annual basis, said Intel’s Mulloy.

“You can reinforce what the policies are,” Paul Otellini, CEO of Intel, the world’s largest chipmaker, said in an interview on Fox Business yesterday. “Anyone who might have been thinking about it is probably not thinking about it today. The long arm of justice can reach out.”

Outside investor relations firms have access to confidential information as part of their jobs, said Jeff Zilka, a general manager at Edelman, a public relations company whose clients include Hewlett-Packard Co. and Microsoft Corp.

‘Learning Moment’

“This is a learning moment for people in my industry,” said Zilka, who oversees the company’s investor relations and financial communications practice for the Midwest.

While the Rajaratnam case has turned the spotlight on Silicon Valley, the area isn’t necessarily a hotbed of insider trading, said Michael Useem, a professor of management at the University of Pennsylvania’s Wharton School.

“The fact that so many tech companies were involved may just be a product of the harvesting methods used by the person,” he said. “It may just be he had a big head start with his contacts in the Valley.”

Nevertheless, technology companies may provide targets for those looking to make use of insider information because their share price movements tend to be more volatile, said Raissi, now a lawyer with Shartsis Friese LLP in San Francisco. That may push more of them to ensure staff are familiar with policies about how to handle financial information.

“Maybe at some companies they simply haven’t been as rigorous as they should be about making sure employees understand the rules,” Raissi said. “I’m sure there are going to be a lot of training courses on that at Silicon Valley companies in the next 30 days.”

To contact the reporters on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net; Brian Womack in San Francisco at bwomack1@bloomberg.net; Ari Levy in San Francisco at alevy5@bloomberg.net

Last Updated: October 20, 2009 00:01 EDT