Rengan Rajaratnam Pleads Not Guilty to Insider Charges

Rengan Rajaratnam, the younger brother of imprisoned hedge-fund founder Raj Rajaratnam, pleaded not guilty to charges that he took part in an insider-trading scheme tied to his brother’s fund, Galleon Group LLC.

Rajaratnam, 42, was indicted last week by a federal grand jury for allegedly conspiring with his brother to trade on material nonpublic information about Clearwire Corp. and Advanced Micro Devices Inc. He entered his plea today before U.S. District Judge Naomi Reice Buchwald in Manhattan federal court.

Rajaratnam was taken into custody by agents of the Federal Bureau of Investigation yesterday morning at 6:30 when he arrived at New York’s John F. Kennedy International Airport on a flight from Brazil. His lawyer Vinoo Varghese said Rajaratnam first learned about the indictment from a story on the Wall Street Journal’s website.

“We contacted the government and told them Mr. Rengan Rajaratnam would voluntarily return to the U.S.,” Varghese told the judge. “He has clearly gone above and beyond to prove his desire to face these charges,” even offering to pay for the plane tickets for the FBI agents to return with him, Varghese said at today’s hearing.

Prosecutors agreed to release Rajaratnam on $1 million bond, citing his voluntary return to the U.S. The bond will be secured by $500,000 in cash and property.

Insider Tips

Prosecutors alleged that Rengan Rajaratnam, while working as a fund manager at Galleon, made almost $1.2 million from trades that occurred in 2008 based on tips provided by his brother and his Rolodex of insiders. He was implicated during his brother’s trial, where wiretapped conversations between the two men were played in court.

An American citizen born in Sri Lanka, Rengan Rajaratnam must also surrender his U.S. passport and remain at his Manhattan home, Assistant U.S. Attorney David Massey said. Rajaratnam is to be released later today and was given a week to obtain two co-signers for his bond. Buchwald scheduled the next court hearing in the case for June 4.

Manhattan U.S. Attorney Preet Bharara’s office has charged more than 75 people since August 2009 as part of its broader insider-trading crackdown, including more than two dozen people tied to the Galleon probe. It has won convictions of at least 71 people.

A parallel insider-trading lawsuit filed by the U.S. Securities and Exchange Commission against Rengan Rajaratnam described a conspiracy that allegedly began in 2006 and lasted until 2008.

Rajaratnam reaped more than $3 million in illicit gains for Galleon and his proprietary account, the SEC alleged. The SEC said its investigation is continuing. The case was assigned to U.S. District Judge John Koeltl.

Indictment Unsealed

Rengan Rajaratnam’s indictment, unsealed last week, charges him with one count of conspiracy to commit securities fraud and six counts of securities fraud. Conspiracy carries a maximum five-year prison sentence, while fraud carries a 20-year maximum.

David Tobin, an attorney for Rajaratnam, said in an e-mailed statement today that his client returned voluntarily after seeing press reports of his indictment.

“Rajaratnam immediately volunteered to return from Brazil, where he had been living and working for the past year, in order to defend himself,” Tobin said.

Rengan Rajaratnam co-founded Sedna Capital Management LLC, a hedge fund advisory firm, after leaving SAC Capital Advisors LP where he worked as an analyst from May 2003 to January 2004.

Stanford Graduate

A graduate of the University of Pennsylvania and Stanford University’s business school, he has also worked at Morgan Stanley. The SEC alleged that after he closed down Sedna he worked for as a portfolio manager at Galleon from 2007 to 2009, when the fund closed after his brother’s arrest.

Dozens of people have been convicted as part of the probe being handled by the Federal Bureau of Investigation office in New York and Bharara’s prosecutors. Danielle Chiesi, who pleaded guilty to insider trading with Raj Rajaratnam, was represented by the judge’s husband, Donald Buchwald.

Massey said the government’s evidence against Rengan Rajaratnam includes wiretapped calls of him and his brother discussing tips that could only have come from Chiesi. He said the government didn’t believe Chiesi would be called by the U.S. as she has pleaded guilty and is in prison.

Varghese said he and his client wouldn’t seek the judge’s recusal from the case, and Buchwald also declined to disqualify herself.

Raj Rajaratnam, 55, is serving an 11-year prison sentence after being convicted in 2011 on 14 counts of conspiracy and securities fraud.

‘Career Arc’

“Rengan Rajaratnam’s career arc paralleled his brother’s,” FBI Assistant Director George Venizelos said in a statement. “He followed in Raj’s footsteps by obtaining an MBA from a top-flight business school. He went to work for Raj at Galleon. As alleged in the indictment, Rengan also engaged in the same illegal conduct as Raj.”

Rengan Rajaratnam took illicit tips from his brother and traded on AMD, Clearwire, Polycom Inc., Hilton Hotels Corp. and Akamai Technologies Inc., regulators said.

The indictment quoted from telephone calls that were secretly recorded by federal agents and played during Raj Rajaratnam’s 2011 trial. That case was the first to make extensive use of wiretaps, a tactic used in organized-crime investigations. At Raj Rajaratnam’s trial, jurors heard more than 40 recordings in which the fund manager could be heard gathering secret tips from his sources.

Rajiv Goel

Rajiv Goel, a former Intel Corp. executive who pleaded guilty to insider trading with Raj Rajaratnam, testified that he told the Galleon co-founder Intel would invest $1 billion in a new wireless network company formed by Clearwire and Sprint Nextel Corp. Goel was a friend of Raj Rajaratnam’s and his former business school classmate.

The U.S. alleged that Raj passed the tip about Clearwire to Rengan in March 2008 so the two could execute trades on Goel’s tip. On March 25, 2008, six days after Goel and Raj spoke, the FBI recorded the brothers discussing a newspaper article describing the deal.

“It’s all over the Wall Street Journal,” Rengan told his brother at 8:22 p.m., according to the wiretapped recording played for jurors in Manhattan federal court. “They’re short on details, but they kind of say, you know, they’re looking to raise as much as $3 billion.”

“OK, sh-t,” Raj Rajaratnam replied. “But I think Clearwire’s share price is gonna rip tomorrow.”

Clearwire Jumps

A day later, Clearwire’s price rose sharply in response to the article, prosecutors said. The U.S. said that Rengan made $101,000 trading on Clearwire in his own personal brokerage account, that he and his brother made more than $231,000 for a Galleon fund and that Raj took in more than $851,000 for a Galleon technology fund, according to prosecutors.

The government also described trading in AMD based on tips provided by Anil Kumar, then a director at McKinsey & Co., that the chipmaker was getting a multibillion-dollar investment from Mubadala Development Co. of Abu Dhabi. Kumar was also a friend of Raj Rajaratnam and had been a business school classmate of the fund manager.

“I just heard that ... AMD had a handshake with the ... Arabs to put in six billion dollars,” Raj Rajaratnam told his brother on an Aug. 15, 2008, call, which was cited by prosecutors in the indictment.

Former Classmate

Later that day, Rengan Rajaratnam called his brother to tell him he had conferred with David Palecek, a former Stanford classmate who was in charge of semiconductors for McKinsey. Rengan said he asked Palecek about buying AMD stock and the proposed deal.

Rengan later called his brother that day and told him Palecek had “spilled his beans” about the deal.

“He’s like, ‘Buy it, buy as much as you can as soon as you can,’” Rengan told his brother on the call.

In a later conversation that was also recorded, Rengan told Raj that his former Stanford friend was “a little dirty” and that he was “definitely, you know, thinking about playing ball” with Galleon.

“‘He said my best ideas are inside information,’” Rengan quoted Palecek as telling him.

Palecek died in 2010 of a virulent staph infection, his lawyer, Catherine Redlich, said during Raj Rajaratnam’s 2011 trial.

‘Never Agreed’

“What the tape does not reflect is that Mr. Palecek never agreed to ‘play ball’ with the Rajaratnams, never received money from them, and never agreed to put his wife on Galleon’s payroll,” Redlich said.

Prosecutors said neither Rengan nor Raj Rajaratnam made any money on the AMD tip because of an overall decline in technology stocks.

During a 2010 pretrial hearing in Raj Rajaratnam’s case, prosecutors and regulators said they were first drawn to focus on insider trading by Rengan Rajaratnam in 2006.

An earlier investigation by the SEC and U.S. prosecutors in San Francisco in 1999 had only resulted in the prosecution of former Intel employee Roomy Khan. She pleaded guilty in April 2001 to wire fraud and agreed to cooperate with the U.S.

Andrew Michaelson, one of the principal SEC lawyers investigating Galleon in the later probe, testified that in September 2006 the agency opened an insider-trading investigation focusing on Galleon because Raj and Rengan Rajaratnam “appeared to be exchanging nonpublic information.”

Another Target

Michaelson, who would later be a prosecutor in the Raj Rajaratnam case, said the SEC questioned Sedna and Galleon employees under oath, reviewed millions of pages of documents and looked at every one of Rengan Rajaratnam’s e-mails and instant messages for 2006. Soon regulators had another target: Raj Rajaratnam, Rengan’s older brother, he said.

Prosecutors said that after they “hit a wall” in the criminal investigation of Raj Rajaratnam, they decided to employ court-authorized wiretaps against the fund manager.

The recordings would eventually also ensnare Rajat Gupta, the former Goldman Sachs Group Inc. director who was caught on wiretapped calls talking to Rajaratnam.

Gupta, 64, also sat on the board of Cincinnati-based Procter & Gamble Co. and ran the consulting firm McKinsey & Co. from 1994 to 2003. He was convicted in June of passing insider tips to Rajaratnam in a conspiracy that ran from 2007 to January 2009.

Gupta, who was sentenced to two years in prison, is free pending his appeal.

The SEC said last week that it has sued 33 defendants in its Galleon-related enforcement actions, with insider-trading reaping more than $96 million in illicit profits by trading in stock of more than 15 companies.

The criminal case is U.S. v. Rajaratnam, 13-cr-00211, U.S. District Court, Southern District of New York (Manhattan); the civil case is SEC v. Rajaratnam, 13-cv-01894, Southern District of New York (Manhattan).

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