8 trades the insiders allegedly made
The government's case against the Galleon crew includes transactions in companies like Google, AMD, Hilton and Sun.
NEW YORK (Fortune) -- The government's case in what it is calling the largest insider trading case involving a U.S. hedge fund contains a detailed list of trades involving household-name companies.
Investigators have pieced together a case that alleges more than $25 million in illegal gains based on trading in 2006-09 on companies including Advanced Micro Devices (AMD, Fortune 500), Akamai (AKAM), Clearwire (CLWR), Google (GOOG, Fortune 500), Hilton, Polycom (PLCM) and Sun Microsystems (JAVA, Fortune 500), among others.
The six people charged include hedge fund billionaire Raj Rajaratnam, founder of Galleon Group; Robert Moffat, IBM's (IBM, Fortune 500) top hardware executive and an oft-discussed CEO candidate; Mark Curland and Danielle Chiesi, executives of the hedge fund New Castle Partners; Anil Kumar, a director at consulting firm McKinsey & Co.; and Rajiv Goel, an executive in Intel's treasury department.
Just what did they allegedly do? Using information gleaned from wiretapped conversations between the accused and others, along with the statements of an apparent informant, SEC investigators have pieced together a series of episodes alleging to show how the defendants used inside information and well-timed trades to turn million-dollar profits.
Those charged have yet to enter pleas in the case. Jim Waldman, a lawyer for Rajaratman, told the Wall Street Journal that the hedge fund chief "is innocent. We're going to fight the charges." Lawyers for some of the other accused said their clients are shocked by the charges and deny wrongdoing.
What follows is a condensed account of eight major trades the suspects made and the inside information they capitalized on, according to the the SEC investigation and complaint. At the center of some of the trades is an unnamed "Tipper A," a person who gathered a great deal of information on companies for Rajaratnam, and whose identity presumably will be made public as the case unfolds in court.
On Jan. 10, 2006, the unnamed source identified in the SEC's complaint as "Tipper A" told Galleon's Rajaratnam that, based on information received from a Polycom insider, revenues at the video-conferencing company for the fourth-quarter of 2005 were about to beat Wall Street estimates. Polycom was set to announce its earnings more than two weeks later.
Rajaratnam sent an instant message to his trader instructing him to "buy 60 [thousand shares] PLCM" for certain Galleon Tech funds. All told, from Jan. 10 through Jan. 25, the date of the Polycom earnings release, Rajaratnam and Galleon bought 245,000 shares of Polycom and 500 Polycom call-option contracts. Polycom did beat the Street, and collectively, the Galleon Tech funds made over $570,000 in connection with their Polycom trades based on Tipper A's tip.
The same scenario was repeated for Polycom's first-quarter 2006 earnings, the complaint says. Galleon made $165,000 on the information. Tipper A made $22,000.
Tipper A allegedly obtained confidential information in advance of a July 3, 2007, announcement that a private equity group would be buying Hilton for $47.50 per share, a premium of $11.45 over the July 3 closing price. Tipper A obtained the information from an analyst who, at the time, was working at Moody's, a rating agency that was evaluating Hilton's debt in connection with the planned buyout. Tipper A bought call option contracts based on the information, and passed on the tip to Rajaratnam.
On July 3, Rajaratnam and Galleon bought 400,000 shares of Hilton in the Galleon Tech funds. That evening, the Hilton transaction was announced. Tipper A sold all of the Hilton call option contracts for a profit of more than $630,000, the complaint says. To compensate the source for the Hilton tip, Tipper A paid the source $10,000. The Galleon Tech funds sold their Hilton shares after the July 3 announcement for a profit of more than $4 million.
Around July 10, 2007, a PR consultant to Google allegedly told Tipper A that Google's second-quarter earnings per share would be down about 25 cents. The Street had estimated yet another strong quarter for the search giant, which was scheduled to report earnings July 19.
Two days later Tipper A bought put options in Google and passed along details of the pending Google miss to Rajaratnam. He and Galleon began buying Google put options for the Galleon Tech funds, and continued buying them through July 19. In addition, Galleon funds bought other options betting on a fall in Google shares and sold short Google stock beginning July 17.
On July 19, Google announced its earnings results, disclosing that its earnings-per-share was indeed 25 cents lower than the prior quarter. Google's share price fell from over $548 per share to almost $520 per share. The Galleon Tech funds' profits from the Google tip were almost $8 million. Tipper A sold all of the put options the day after the July 19 announcement for a profit of over $500,000.
Rajaratnam allegedly tapped former Wharton classmate and Intel executive Rajiv Goel just before Intel's (INTL) scheduled fourth-quarter 2006 earnings announcement to get inside information on the world's largest chipmaker. On Jan. 8, 2007, Rajaratnam contacted Intel's Goel. The next day, Rajaratnam bought 1 million shares of Intel at $21.08 per share. On Jan, 11, he bought 500,000 more at $21.65 per share.
Goel and Rajaratnam communicated again multiple times over the Martin Luther King Day weekend that followed. On Tuesday, Jan. 16, the day the markets reopened, Rajaratnam reversed course, selling the Galleon Tech funds' entire 1.5 million share long position in Intel at $22.03 per share, and making a profit of a little over $1 million
Later that day, after the markets closed, Intel released its fourth-quarter 2006 earnings. Although the company's earnings beat analysts' projections, its guidance was below expectations. Intel's stock price fell nearly 5% on the news, but Rajaratnam was already out of the stock.
According to Intel officials, Goel has been placed on administrative leave pending the court case.
In early February 2008, Goel allegedly tipped Rajaratnam that there was a pending joint venture between wireless broadband company Clearwire and Sprint (S, Fortune 500). Intel was a huge shareholder in Clearwire. Over the next three months, Galleon Tech funds bought and sold Clearwire shares on three occasions. Each time, the Galleon Tech funds traded in advance of news reports relating to the deal between Clearwire and Sprint, and shortly after calls between Goel and Rajaratnam. Overall, the Galleon Tech funds realized gains of about $780,000 on their Clearwire trading between February and May 2008. On May 8, the joint venture between Sprint and Clearwire was publicly announced.
As payback for Goel's tips, Rajaratnam (or someone acting on his behalf) executed trades in Goel's personal brokerage account based on inside information concerning Hilton and PeopleSupport (the government notes that a Galleon director sits on the PeopleSupport's board of directors though no charges of wrongdoing have been brought against that person), which resulted in nearly $250,000 in profits for Goel.
Another hedge fund executive, New Castle's Danielle Chiesi, is an acquaintance of Rajaratnam. When an Akamai executive told her that the Internet infrastructure company would trend lower in the company's second-quarter 2008 guidance to investors, the government claims she passed along the information to Rajaratnam. The consensus among Akamai's management was that Akamai's stock price would decline in the wake of the lowered guidance scheduled for July 30.
Chiesi and the Akamai source spoke multiple times between July 2 and July 24. Chiesi told what she had learned from the Akamai source to her colleague at New Castle, Mark Kurland. On July 25, several New Castle funds took short positions in Akamai shares. The positions grew through July 30. Rajaratnam's Galleon funds also built up a short position during the same period.
In its second-quarter 2008 earnings announcement on July 30, Akamai's results disappointed investors. The stock fell nearly 20% following the announcement. New Castle made $2.4 million. The Galleon Tech funds took home more than $3.2 million.
In January 2009, IBM was conducting due diligence on Sun Microsystems in preparation for an offer to buy it (Sun was ultimately bought by Oracle (ORCL, Fortune 500)). As part of that process, Sun opened its books to IBM, providing its second-quarter 2009 results in advance of the scheduled Jan. 27 announcement.
Because much of Sun's business is hardware, IBM's top hardware executive Robert Moffat was involved in the evaluation of Sun. Moffat allegedly had access to Sun's earnings results. He and Chiesi were also friends and contacted each other repeatedly during January 2009. The frequency of contact between the two increased just prior to the Sun earnings release, investigators say.
On Jan. 26, New Castle began acquiring a substantial long position in Sun. On Jan. 27, after the market close, Sun reported earnings that exceeded Wall Street's estimates, posting a two-cent per-share profit when analysts had expected a loss. Sun shares soared 21% on the news. New Castle made almost $1 million.
On June 1, 2008, McKinsey & Co. began advising Advanced Micro Devices over its negotiations with two Abu Dhabi sovereign entities. One, a joint venture with the Abu Dhabi government, Advanced Technology Investment Co., would take over AMD's chip manufacturing. The other, an Abu Dhabi sovereign wealth fund, Mubadala Investment Co., would provide a large investment in AMD (in the end, it would total $314 million). According to the SEC, Anil Kumar was one of the McKinsey team briefed on the negotiations. Kumar also knew Rajaratnam.
On Aug. 14, Kumar learned that the two deals were finally getting done. The next day he told Rajaratnam, investigators say. Almost immediately, Rajaratnam and Galleon increased their long position in AMD by buying more than 2.5 million shares in Galleon funds and continuing to build their long position until just before the announcement of the AMD transactions. Rajaratnam and Galleon bought 4 million AMD shares on Sept. 25 and 26, and 1.65 million more on Oct. 3. On Oct. 8, the deals were announced publicly. AMD's stock price increased by about 25%. All told, the value of Galleon's entire position in AMD increased approximately $9.5 million in Oct. 6-7.
However, the allegedly ill-gotten gain was wiped out by the financial crisis of the time. Because the Galleon Tech funds had accumulated much of their AMD position beginning in August, before the crisis sent stock prices, including AMD's, tumbling in September and October, the funds lost money on the overall trade.