By Jonathan Yates
When the defense of The Galleon Group founder Raj Rajaratnam rested on April 18, 2011, it was deploying the same strategy that Dennis Levine, the Drexel Burnham managing director, utilized in his trial for insider trading back in the mid 1980s: all the large sized profits were from publicly available research and were the results of both working harder and analyzing more perspicaciously than the competition on Wall Street. That was the only similiarity between the two until May 11, 2011, when Rajaratnam was found guilty on five counts of conspiracy and nine charges of securities fraud charges in the largest insider trading case in history.
While Levine made his way up the ranks of Wall Street as a result of growing up in Bayside, Queens, attending public college and graduate school at Baruch College in New York City and following the “factory town” route the way others go to work for the auto industry in Michigan or for the government in the Washington, DC area, Rajaratnam journeyed literally half way around the world from Sri Lanka, an island nation off the southern coast of India in the Indian Ocean to become a hedge operator in Manhattan.
Rajaratnam studied engineering at the University of Sussex, in England. From there, he earned his MBA from the Wharton School of Finance in Philadelphia. One of the charges against Rajaratnam is that he paid a classmate from Wharton, Anil Kumar, $500,000 a year to feed him insider trading tips from his post when he was a Director with McKinsey & Co., the consulting firm.
Starting off his career on Wall Street as a lending officer in the High Technology Group at Chase Manhattan Bank, Rajaratnam then joined Needham & Company as a research analyst in1985. At Needham & Co., an investment bank with a specialty in high tech and health care, he quickly ascended through the ranks, eventually becoming President in 1991.
Rajaratnam founded The Galleon Group in January 1997 to be a different breed of hedge fund. While at Needham, he formed a hedge fund in March 1992, Needham Emerging Growth Partnership that he later bought and renamed “Galleon.” From its profile:
Galleon’s philosophy and approach differs from that of other hedge funds in the fundamental belief that it is possible to deliver superior returns to our investors without employing leverage. Galleon has built an organization where stock picking on both the long and short sides, rather than market timing, is the key to our success.
Other than eschewing leverage and market timing, The Galleon Group featured other unique methods of doing business. Clients were allowed to sit in on research meetings. All partners were accessible to investors.
This paid off as The Galleon Group became one of the ten largest hedge funds in the world with over $7 billion in assets in 2008. The Galleon Diversified Fund, the flagship operation, with $1.2 billion in holdings at one time, claimed in a letter to investors in 2009 that it had a net annualized return of 22.3 percent.
For Rajaratnam, the personal returns were even more rewarding. In 2009, Rajaratnam, according to Forbes magazine, was the 236th richest American with a net worth of $1.8 billion. At that time, he was also the wealthiest Sri Lankan in the world.
Recognized as one of the top investors in the world in the book, The New Investment Superstars, Rajaratnam attributed his success to hard work, diligent research and his career contacts in the high tech sector. As an example of the demands for working hard: those late to the daily 8:35 am research meeting at The Galleon Group were fined $25.00.
Stock picking as a result of research efforts posted a 21.5 percent return for The Galleon Diversified Fund while the S&P 500 Index of the largest US companies had only a 7.6 percent return over the same period. Contacts with high tech companies furnished The Galleon Group with much of the $830 million it had invested by the end of its first year of operations in 1997.
Superior returns in the early 2000s saw The Galleon Group grow to over $5 billion under management by 2001. While the Internet bubble burst in 2000. The Galleon Diversified Fund rose 43.7 percent in a three year period, ending in 2002. Over the same span, the S&P 500 Index collapsed, falling 37. 6 percent and dragging the country into a recession.
The Galleon Group was definitely not from the Buffet school of buy a stock and sit on it forever. Over a nine month period in 2009, for example, Rajaratnam bought and sold shares of more than 600 companies. These trades were not in penny stocks, either: his average daily volume was $141,533,313 over one five year period.
On October 16, 2009, Rajaratnam and five others were arrested on a variety of inside trading charges for profits of $20 million from 2006 to 2009 alleged to be illegal in transactions involving Google, Clearwire, and Hilton Hotels by the Federal Government, the largest ever case involving a hedge fund. Bail for him was set at $100 million, which he met.
Very active in the affairs of his native country, stocks in Sri Lanka fell sharply as a result of his arrest: the Colombo Exchange was off 3.9 percent, before recovering to be down only 1.6 percent on the day after his arrest. The Sri Lankan Securities and Exchange Commission is also investigating Rajaratnam.
During his trial, at which he did not testify in his own defense, it was highlighted by the prosecution that one of his witnesses, a former employee, Richard Schutte had opened a hedge fund after The Galleon Group was shut down in which Rajaratnam was now the main financier. Only eight weeks before his trial started, Rajaratnam invested $15 million in Schutte’s hedge fund, SpotTail, which had total assets of only $35 million, making him, by far, the largest investor.
Over all the trades executed by Rajaratnam at The Galleon Group, well over a million, only 126, about 0.3 percent, are charged with benefitting from inside information by the Federal Government. Due to the information explosion since the mid 1980s with the Internet and other systems it would seem that a defense of savvy stock picking from more publicly available data would be more viable. However, before the trial of Rajaratnam started, 46 were charged with insider trading in the case and 29 entered guilty pleas to avoid prosecution. Facing a lengthy maximum term in prison, Rajartnam was convicted of every charge filed by the Federal Government. As he refused to cooperate while so many others did, he could be looking at being made the proverbial “example” to others as the Feds needed a big win after the Bear Stearns debacle where all got off to serve notice that white collar crime will not be tolerated on Wall Street, no might how rich and how powerful the perpetrator.