Nov. 13 (Bloomberg) -- About 60 Muslim fishermen and their families congregated in a community hall on Sri Lanka’s east coast to pray for Raj Rajaratnam after he was arrested for alleged insider trading at his New York hedge fund.

The billionaire co-founder of Galleon Group LLC helped build 240 apartments in Kalmunai with a $5 million donation following the 2004 tsunami that swept away people and houses in his homeland, leaving 30,000 people dead.

“We don’t know Raj Rajaratnam. But we were told that the funds were given by him for the housing project,” said K.M. Farook, who attended last month’s service in Islamabath Village. “When we heard that he had fallen into some trouble we only wanted to express our gratitude to this person by pleading to almighty Allah to bless him and give him relief.”

Rajaratnam’s Oct. 16 arrest, in what U.S. prosecutors say is the largest insider-trading case involving hedge funds, was an unsettling jolt to an island that took pride in his success and benefited from his wealth. He invested tens of millions of dollars in an economy ravaged by civil war and donated millions more.

Investors courted Rajaratnam, the top native-born Sri Lankan on Forbes magazine’s list of wealthiest people, and he became the biggest individual investor in the Colombo Stock Exchange.

‘Sense of Disappointment’

“Raj Rajaratnam was widely held up as a Sri Lankan who has gone on to do well overseas,” said Channa Amaratunga, who advises on stock and bond investments at Colombo-based C.T. Capital Pvt. “There is a sense of disappointment here, but we will have to see how it all pans out.”

After the arrest, Sri Lankan stocks, Asia’s best performers, posted the biggest weekly decline this year, and the price of the government’s latest bond fell a week after investors submitted bids for 13 times the $500 million offering.

The benchmark Colombo All-Share Index extended its decline to a two-month low on Nov. 10, then rose 3 percent in the next two days. The 7.4 percent bond maturing in January 2015 rose to 102.31 on Nov. 11 from as low as 100.44 on Nov. 3, according to data compiled by Bloomberg.

Rajaratnam, 52, and his family were vacationing on the teardrop-shaped island when the Indian Ocean tsunami hit on Dec. 26, 2004. Homes for the displaced were built with Rajaratnam’s money by John Keells Holdings Plc, Hemas Holdings Plc and Singer Sri Lanka Plc.

“That was a spontaneous gesture on his part and that, to me, reflects the person,” said Ajit Gunewardene, deputy chairman of John Keells, the nation’s biggest diversified company.

100 More Houses

Gunewardene met Rajaratnam, now a U.S. citizen, when he first invested in John Keells about seven years ago. Rajaratnam owns about 8 percent of the business, which includes tea plantations and property development. The stake is valued at almost $60 million.

The company used Rajaratnam’s donation to help build 100 houses in Monrovia Estate in the southwest. Resident S.M. Ranjani Samanthala said her brother, husband and 10-year-old daughter were washed away by the tsunami.

“It is a relief for me to be in this house,” said Ranjani, who sells sugar, rice and toothpaste from a dusty room. “I was desperate and didn’t want to live. Now that we have shelter, we have some hope.”

Two days after Rajaratnam’s arrest, the Island newspaper called him a “generous contributor” to relief projects and said he “undoubtedly” helped influence investors to consider local assets.

‘I Was Shocked’

Rajaratnam had a net worth of $1.3 billion, Forbes said. Galleon Group managed about $3.7 billion before his arrest.

The investments by Rajaratnam and Galleon in Sri Lankan shares were valued at about 11 billion rupees ($96 million) on Nov. 9, according to CT Smith Stockbrokers Pvt. in Colombo. That’s 1.2 percent of the market.

His personal investments won’t be affected by the hedge fund’s liquidation following criminal and civil probes, a person familiar with the matter said Nov. 4, requesting not to be identified because the information was private.

Ashroff Omar, chief executive officer of Colombo-based Brandix Lanka Ltd., who first met Rajaratnam about 10 years ago, called him after his arrest to offer “moral support.”

“I was shocked when people said that he’s using unfair means, which I can’t reconcile with the man that I know,” said Omar, who runs Sri Lanka’s biggest apparel exporter. “He’s very focused and particular about governance all the time.”

Crocs, Hippos

Rajaratnam, who said he is innocent, is free on $100 million bail. An additional 19 people have been charged, including other hedge-fund managers and executives from International Business Machines Corp. and Intel Corp., in schemes that the U.S. Securities and Exchange Commission says netted $53 million in illegal profits from trading on material nonpublic information.

Singer Natasha Rathnayake, who performed at Rajaratnam’s 50th birthday party in 2007 in Kenya, said she was “a little disappointed” by the charges. Rajaratnam flew guests at his expense, according to five attendees who asked not to be named because it was a private event.

Rajaratnam rented the entire Mara Safari Club in Maasai Mara, where more than 80 guests slept in luxury tents along the crocodile- and hippopotamus-filled Mara River.

“He’s always very witty, jovial, fun-loving,” said Rathnayake, of Colombo.

Rajaratnam, an ethnic Tamil, was arrested five months after Sri Lanka’s army won its 26-year civil war against the Liberation Tigers of Tamil Eelam, or LTTE. The group fought for a separate Tamil homeland in the north and east.

Cease-Fire

Rajaratnam started scouting for investments in 2002 after both sides signed a cease-fire. Sri Lanka was “in the dumps” from being shunned by foreign investors, said Murtaza Jafferjee, managing director of JB Securities Pvt. in Colombo.

“He said he’d transfer $5 million into his account when he initially came,” Jafferjee said. “I never knew there were Sri Lankans who had this kind of money.”

Rajaratnam intended to pour in more money after the war ended in May. He paid an undisclosed amount in June for 20 percent of brokerage firm Lanka Orix Securities Pvt., now known as Capital Trust Securities Pvt.

Before his arrest, he planned a trip to London to gauge interest in a $200 million private-equity fund focused on Sri Lankan infrastructure investments, people with knowledge of the matter said last month. He would use his own money and raise the rest on London’s Alternative Investment Market, one of the people said.

Rajaratnam also donated 5 million rupees to the St. Thomas Preparatory School in Colombo, which he attended until moving away at age 11.

‘Concerned Old Boy’

The primarily Christian institution sits on oceanfront property along the capital’s main thoroughfare, just steps from President Mahinda Rajapaksa’s office.

“I had a brief meeting with him after the tsunami when he visited the school and made a donation of 5 million rupees, which has benefited vastly to the overall good of our school,” principal N.Y. Casie Chetty said.

“He just seemed like a concerned old boy with strong gratitude to the institution that nurtured him.”

To contact the reporter on this story: Netty Ismail in Singapore nismail3@bloomberg.net.

Last Updated: November 12, 2009 14:43 EST