The financial world and Sri Lanka’s business community went into a tailspin last week following the arrest of billionaire hedge fund manager Raj Rajaratnam in New York, founder of the Galleon hedge fund which at one time managed US$7 billion in assets.
Authorities in the United States said Mr. Rajaratnam aged 52 who is a US and Sri Lankan national, had been the mastermind behind one of the biggest insider trading deals worth US$25 million.
The US authorities subsequently announced that Mr. Rajaratnam had surfaced in an earlier, separate probe into US fund raising by a Sri Lankan terrorist group, the LTTE.
A Wall Street Journal report this week stated that as part of that investigation, federal agents said they uncovered documents showing Mr. Rajaratnam was among several wealthy Sri Lankans in the U.S. whose donations to a Maryland-based charity, the Tamil Rehabilitation Organization (TRO) made their way to the LTTE.
According to another Wall Street Journal report, Galleon hedge fund is moving to unload some its technology stocks and other holdings to raise cash after facing heavy withdrawal requests after last Friday’s arrest of Mr. Rajaratnam.
The Wall Street Journal said investors have sought to withdraw about $1.3 billion of the $3.7 billion in assets Galleon manages, traders say. Moreover, two of the brokerage firms Galleon normally deals with, Bank of America Merrill Lynch and Barclays, have told Galleon they will no longer trade securities positions with the fund firm.
Charges
Last week, federal prosecutors charged Mr. Rajaratnam with securities fraud and conspiracy to commit securities fraud. On its website, the US Securities and Exchange Commission (SEC) stated that on October 16th 2009, it filed a civil injunctive action in the United States District Court for the Southern District of New York charging billionaire Raj Rajaratnam and his New York-based hedge fund advisory firm Galleon Management LP with engaging in a massive insider trading scheme that generated more than $25 million in illicit gains.
The SEC also charged six others involved in the scheme, including senior executives at major companies IBM, Intel and McKinsey & Company.
The SEC’s complaint, filed in federal court in Manhattan, alleges that Rajaratnam tapped into his network of friends and close business associates to obtain insider tips and confidential information about corporate earnings or takeover activity at several companies, including Google, Hilton and Sun Microsystems. He then used the non-public information to illegally trade on behalf of Galleon.
Future of Galleon
A report by hedge fund correspondent for the Financial Times of London Sam Jones quoted brokers to the Galleon Group as saying that it is rapidly liquidating its investments in anticipation of a wave of investor redemptions.
Two other prime brokers repoted Galleon was closing out its investments. One estimated Galleon was likely to move around a third of assets into cash.
Mr. Jones reported that in a letter to clients and investors sent this Monday evening, Mr. Rajaratnam said the charges brought against him by US authorities were ‘without exception, entirely baseless’ and said he would continue to work for Galleon and remained committed to investors and employees.
The Financial Times report stated that several large institutional clients have already said anonymously that they will be redeeming their investments in Galleon’s funds as soon as
Under-fire Raj Rajaratnam explains to employees, investors, friends
Alleged insider-dealing US trader Raj Rajaratnam on Wednesday issued a letter to employees of his Galleon Fund and its investors proclaiming his innocence on charges framed against him by US authorities last week. News of the Sri Lankan-born billionaire’s arrest and subsequent bail has been widely reported in the international media. On Wednesday, the New York Times carried the letter written by Rajaratnam.
The full text of the letter is as follows:
October 21, 2009 ,
Dear Galleon Employees, Clients and Friends,
“I have decided that it is now in the best interest of our investors and employees to conduct an orderly wind down of Galleon’s funds while we explore various alternatives for our business. At this important time, I want to reassure investors of the liquidity of our funds and assure Galleon employees that we are seeking the best way to keep together what I believe is the best long / short equity team in the business.”
“As many of you know, we have built our business on the fundamental belief in rigorous investment analysis combined with active trading around core positions. We have encouraged and invited our investors to attend our daily research morning meetings. Many of you have done so and got a first-hand look at our process.
This research process is the core of our investment and trading strategy.”
“The privilege of managing investors’ capital is a responsibility that I have always taken very seriously. I want to reiterate that I am innocent of all charges and will defend myself against these accusations with the same intensity and focus I have brought to managing our investors’ capital.”
“For those who have been my partners and supporters over the last 17 years, I sincerely thank you. I also want to thank you for the innumerable expressions of support I have received from you over the past few days. “
Sincerely
Raj Rajaratnam |
possible. Documents say investors in Galleon’s flagship Diversified fund are entitled to redeem their investments on a quarterly basis. The next redemption window is in mid-November. Although investors in the Technology fund, which is at the centre of insider trading allegations may redeem on a monthly basis, the report stated that people close to the fund say the majority of the funds’ investments are made through the parent diversified fund.
The Financial Times report further stated that even asset managers that have not invested with Galleon say they took numerous calls over the weekend from anxious clients asking about potential exposures which highlights the particularly sensitive state of the hedge fund industry in the wake of the Bernie Madoff scandal last year.
Rajaratnam
A Wall Street Journal report this week said Mr. Rajaratnam grew up in a respected, middle-class family in Colombo. His father was the chairman of a sewing machine company, an important post in Sri Lanka’s garment exporting industry. Mr. Rajaratnam left Sri Lanka to study at a young age and after getting a college degree at the University of Sussex in the U.K. and a business degree from the Wharton School at the University of Pennsylvania, he started a career abroad.
The Wall Street Journal reported that while he would make occasional visits to his homeland over the years, it wasn’t until around 2001 that he started diverting slivers of his hedge-fund billions to Sri Lanka, according to friends as well as the executives of companies he has bought into.
With few big companies to invest in, the Wall Street Journal said the total value of the stock market here is only around $10 billion and Mr. Rajaratnam piled his money into the limited number of large, blue-chip shares. He and his funds quickly became the biggest shareholders in many of Sri Lanka's top companies.
As of the end of June, analysts estimate, Mr. Rajaratnam and funds associated with him controlled 9% of conglomerate John Keells Holdings PLC, Sri Lanka’s largest listed company as well as more than 5% stakes in many of the country's top banks, including Commercial Bank of Ceylon Ltd., National Development Bank Ltd. and DFCC Bank.
Terrorism probe
The Wall Street Journal reported that in court documents related to the terrorism case, an FBI agent cites documents uncovered in court-authorized searches as showing donations to TRO USA made by a person identified only as "individual B." Mr. Rajaratnam wasn't named in the filings but is the person identified as "individual B," according to people familiar with the probe.
"Individual B" made donations to TRO USA totaling $1 million in 2000, according to bank records cited by the FBI. In 2004, "individual B" made an additional $1 million donation, according to bank records cited by the FBI. The funds were then wired to the TRO organization's Sri Lanka bank accounts.
Mr. Rajaratnam was a frequent contributor to various causes, from those that promoted development in the Indian subcontinent to programs that benefited lower-income South Asian youth in the New York area.
The Wall Street Journal also stated that Mr. Rajaratnam was active politically. Data from the Center for Responsive Politics, a nonpartisan group that tracks political contributions, shows Mr. Rajaratnam donated $26,200 to the Democratic Party's fund-raising arm in 2007.
He also provided $4,600 in 2007 to the campaign of Hillary Clinton, now secretary of state, and $4,600 in 2008 to the campaign of President Barack Obama. A Democratic National Committee spokesman said contributions to the Democratic National Committee and the Obama campaign from Mr. Rajaratnam will be donated to charity. Representatives at the State Department didn't immediately comment.
The report further said that in the Sri Lankan investment world, rumors that he could be buying or selling stakes in companies can drive prices on the Colombo Stock Exchange (CSE), according to local businesspeople.
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