13-1 Introduction The Galleon Group was a privately owned hedge fund firm that provided services and information about investments such as stocks, bonds, and other financial instruments. Galleon made money for itself and others by picking stocks and managing portfolios and hedge funds for investors. At its peak, Galleon was responsible for more than $7 billion in investor income. The company’s philosophy was that it was possible to deliver superior returns to investors without employing common high-risk tactics such as leverage or market timing. Founded in 1997, Galleon attracted employees from prestigious investment firms such as Goldman Sachs, Needham & Co., and ING Barings. Every month the company held meetings where executives explained the status and strategy of each fund to investors. In addition, Galleon told investors that no employee would be personally trading in any stock or fund the investors held. In 2009 Raj Rajaratnam, the head of Galleon, was indicted on 14 counts of securities fraud and conspiracy, as well as sued by the Securities and Exchange Commission (SEC) for insider trading. He and five others were accused of using nonpublic information from company insiders and consultants to make millions in personal profits. Rajaratnam’s trial began in 2011, and although he pleaded not guilty, he was convicted on all 14 counts, fined over $158 million in civil and criminal penalties, and is currently serving an 11-year sentence.13-2 Raj Rajaratnam Rajaratnam, born in Sri Lanka to a middle-class family, received his bachelor’s degree in engineering from the University of Sussex in England. In 1983 he earned his MBA from the University of Pennsylvania’s Wharton School of Business. With a focus on the computer chip industry, he meticulously developed contacts. He went to manufacturing plants, talked to employees, and connected with executives who would later work with Galleon on their companies’ initial public offerings. In 1985 the investment banking boutique Needham & Co. hired Rajaratnam as an analyst. The corporate culture at Needham & Co. profoundly influenced Rajaratnam and his business philosophy. George Needham was obsessive about minimizing expenses, making employees stay in budget hotel rooms and take midnight flights to and from meetings. The company also urged analysts to gather as much information as possible. They were encouraged to sift through garbage, question disgruntled employees, and even place people in jobs in target industries. Analysts went to professional meetings, questioned academics doing research and consulting, and set up clandestine agencies that collected information. At Needham & Co., Rajaratnam developed an aggressive networking and note-taking research strategy that enabled him to make accurate predictions about companies’ financial situations. Rajaratnam rose rapidly through the ranks at Needham to become president of the company by 1991. Rajaratnam’s personality also began to impact the company’s cu ...

1. 13-1 Introduction
The Galleon Group was a privately owned hedge fund firm that
provided services and information about investments such as
stocks, bonds, and other financial instruments. Galleon made
money for itself and others by picking stocks and managing
portfolios and hedge funds for investors. At its peak, Galleon
was responsible for more than $7 billion in investor income.
The company’s philosophy was that it was possible to deliver
superior returns to investors without employing common high-
risk tactics such as leverage or market timing. Founded in 1997,
Galleon attracted employees from prestigious investment firms
such as Goldman Sachs, Needham & Co., and ING Barings.
Every month the company held meetings where executives
explained the status and strategy of each fund to investors. In
addition, Galleon told investors that no employee would be
personally trading in any stock or fund the investors held.
In 2009 Raj Rajaratnam, the head of Galleon, was indicted on
14 counts of securities fraud and conspiracy, as well as sued by
the Securities and Exchange Commission (SEC) for insider
trading. He and five others were accused of using nonpublic
information from company insiders and consultants to make
millions in personal profits. Rajaratnam’s trial began in 2011,
and although he pleaded not guilty, he was convicted on all 14
counts, fined over $158 million in civil and criminal penalties,
and is currently serving an 11-year sentence.13-2 Raj
Rajaratnam
Rajaratnam, born in Sri Lanka to a middle-class family,
received his bachelor’s degree in engineering from the
University of Sussex in England. In 1983 he earned his MBA
from the University of Pennsylvania’s Wharton School of
Business. With a focus on the computer chip industry, he
meticulously developed contacts. He went to manufacturing
plants, talked to employees, and connected with executives who
would later work with Galleon on their companies’ initial public

2. offerings.
In 1985 the investment banking boutique Needham & Co. hired
Rajaratnam as an analyst. The corporate culture at Needham &
Co. profoundly influenced Rajaratnam and his business
philosophy. George Needham was obsessive about minimizing
expenses, making employees stay in budget hotel rooms and
take midnight flights to and from meetings. The company also
urged analysts to gather as much information as possible. They
were encouraged to sift through garbage, question disgruntled
employees, and even place people in jobs in target industries.
Analysts went to professional meetings, questioned academics
doing research and consulting, and set up clandestine agencies
that collected information. At Needham & Co., Rajaratnam
developed an aggressive networking and note-taking research
strategy that enabled him to make accurate predictions about
companies’ financial situations.
Rajaratnam rose rapidly through the ranks at Needham to
become president of the company by 1991. Rajaratnam’s
personality also began to impact the company’s culture.
Rajaratnam once told a new analyst that Needham’s name was
on the company, but he was the real center of power, the one
who “makes things happen.” He began to push ethical limits
when gathering information about companies. For example,
concerns about Rajaratnam’s activities ended stock brokerage
Paine, Webber and Co.’s interest in buying Needham. Soon,
similar worries spurred complaints from some inside Needham.
By 1996, at least five Needham executives were concerned
about Rajaratnam’s conduct. Additionally, many of Needham’s
clients complained. Rajaratnam’s multiple company roles as
president, fund manager, and sometimes stock analyst were a
potential conflict of interest situation; investment banks usually
separate those roles to prevent clashes between the interests of
clients and bank-run funds. In 1996, after 11 years at Needham,
Rajaratnam left the company and started the Galleon Group,
taking several Needham employees with him
13-3 Accusations of Insider Trading at Galleon

3. At Galleon, Rajaratnam developed a flamboyant leadership
style. During one meeting, Rajaratnam hired a dwarf to act as an
analyst assigned to cover “small-cap” stocks. At another
meeting, when Taser International, Inc. executives came to
make an investment pitch, Rajaratnam offered $5,000 to anyone
who would agree to be shocked. One trader, Keryn Limmer,
volunteered to be shocked and was rendered unconscious.
Rajaratnam also used his personal fortune to grow Galleon’s
business. For the 2007 Super Bowl, he threw a lavish party for
wealthy investors and executives at a $250,000-a-week mansion
on a man-made island in Biscayne Bay off the Florida coast.
At the same time, Rajaratnam contributed to various causes
promoting development in the Indian subcontinent, as well as
programs benefiting lower-income South Asian youths in the
New York area. He joined the board of the Harlem Children’s
Zone, an educational nonprofit. He also raised nearly $7.5
million for victims of the 2004 South Asian tsunami. For his
philanthropy, he was later honored with a symphony
performance at the Lincoln Center in New York.
However, Rajaratnam was already in trouble with the
government. In 2005 he paid over $20 million to settle a federal
investigation into a fake tax shelter used to hide $52 million
from taxation. Rajaratnam and his business partner then sued
their lawyers, claiming they had no idea the shelter was illegal;
the pair was awarded $10 million in damages. Galleon also paid
$2 million in 2005 to settle an SEC investigation into its stock
trading practices. In addition, Intel discovered in 2001 that
Roomy Khan, an Intel employee, had leaked information about
sales and production to Rajaratnam. When Khan left Intel, she
took a job with Galleon. Although Intel reported the incidents to
the authorities, and Khan served six months of house arrest after
pleading guilty to wire fraud and agreeing to cooperate in the
investigation against Rajaratnam, the prosecutors could not
prove that Rajaratnam actually made trades based on the inside
information. As a result, the investigation was abandoned.
Analysts live or die by the information they acquire on publicly

4. traded firms. As such, there is a constant struggle to gather key
information that can predict changes in stock prices, quarterly
reports, and revenue. Rajaratnam had a deep network of
acquaintances, including employees at Goldman Sachs Group,
Intel Corp., McKinsey & Co., and Applied Materials, Inc.
However, federal investigators were suspicious that the
networking and research at Galleon involved methods more
illicit than simply maintaining a good contact list. In 2007 SEC
lawyers discovered a new text message from Roomy Khan
advising Rajaratnam to “wait for guidance” before buying a
stock. The SEC convinced Khan to again cooperate in their
investigation and allow them to record her conversations with
Rajaratnam. This single wiretap eventually led to the discovery
of several insider trading rings as investigators persuaded more
people to participate in the operation over the course of two
years. Table 1 describes the central players.
13-4 Arrest and Trial
In October 2009, Raj Rajaratnam was arrested on 14 charges of
securities and wire fraud. At the same time, the SEC filed civil
insider trading charges against him. Rajaratnam was released on
a $100 million bond and immediately hired several top defense
attorneys and public relations specialists. His criminal trial
began in March 2011.
The laws on insider trading are vague and often make it difficult
to convict white-collar criminals. Prosecutors had to prove
Rajaratnam not only traded on information he knew was
confidential but also that the information was important enough
to affect the price of a company’s stock. The government’s main
evidence consisted of 45 recorded phone calls between
individuals suspected of insider trading, including six witnesses
who had already pled guilty and were aiding federal
investigators. In many of these phone calls, Raj Rajaratnam
discussed confidential information with investors and insiders
before the information was released to the public. In one
recording, Rajaratnam told employees to cover up evidence of
insider trading. Another recording suggests Rajaratnam received

5. a tip from someone on Goldman Sachs board that the company’s
stock price was going to decrease. That information had been
presented at a confidential Goldman Sachs board meeting only a
day earlier.
The challenge for the prosecution was to prove Rajaratnam used
these tips to make illicit trades. Wiretaps of conversations
between Goldman Sachs board member Rajat Gupta and
Rajaratnam, along with Rajaratnam’s subsequent actions, imply
this occurred. For instance, during a board meeting on
September 23, 2008, Goldman Sachs board members discussed a
$5 billion preferred stock investment in Goldman Sachs by
Berkshire Hathaway along with a public equity offering.
According to the prosecution, a few minutes after the meeting,
Gupta called Rajaratnam. That same day, just before the market
closed, Galleon bought 175,000 shares in Goldman Sachs stock.
The news about Berkshire Hathaway was publicly announced
after the market closed, and the next morning the stock went
from $125.05 to $128.44. Galleon liquidated the stock and
generated a profit of $900,000.
The government had several key witnesses from the insider
trading rings who cooperated with investigators. Before the start
of Rajaratnam’s trial, 19 members of the Galleon network pled
guilty to charges of insider trading, and some agreed to testify
against Rajaratnam. Anil Kumar, who pleaded guilty to
providing insider information in exchange for over $1.75
million wired to a secret offshore account, told the jury that
Rajaratnam offered to hire him as a consultant but told him that
he did not want traditional industry research. Rajaratnam also
told Kumar his ideas were worth a lot of money.
The prosecution argued that Rajaratnam corrupted his friends
and employees in order to make profits for himself and Galleon.
In the closing argument, Assistant U.S. Attorney Reed Brodsky
highlighted that Rajaratnam used his contacts to gain certainty
in areas where everyone else had none.
In order to convict Rajaratnam of insider trading, the
government had to prove the information he received could only

6. have been acquired via inside sources. Rajaratnam’s defense
maintained that some of the information Rajaratnam used was
publicly available and he was not aware other information had
not been publicly disclosed. The defense argued Galleon’s
public announcements, press releases, investor meetings,
government filings, and additional sources showed that the
information had appeared days and weeks before Rajaratnam
and others used that information. Good investment advisors are
in the business of acquiring, analyzing, and making calculated
predictions so their clients’ investments increase. The defense
attorneys argued that Rajaratnam’s access to corporate
executives was the reason his investors hired him. The defense
also claimed these same executives were aware of the law and
of their own duties to their employers and shareholders, and
they should have known what they could and could not say
about their businesses, whereas Rajaratnam’s obligations were
to his investors.
Rajaratnam lost money on some of the trades the government
said were based on inside information. The defense argued that
if he had insider information, the opposite should be true. The
defense maintained that Galleon’s analysts were right only
about half of the time, and if they were cheating, they should
have been right all of the time. The defense also questioned the
validity of some of the prosecution’s witnesses. For example,
one witness confessed to the fabrication of a false affidavit,
doctor’s letter, tax forms, and bank letters, allegedly to protect
his original statements to the prosecution. The defense argued
that many of the prosecution’s witnesses lied to save themselves
from heavier prison terms for unrelated misdeeds. Anil Kumar
testified that between 2004 and 2009, he gave material
nonpublic information about several companies to Rajaratnam.
However, although Galleon’s records show that it paid Kumar
consulting fees, he never shared these consulting fees with his
McKinsey partners, instead hiding them in shell companies in
overseas bank accounts and failing to report them on his tax
returns. Then there is Rajiv Goel, who allegedly gave

7. Rajaratnam material nonpublic information obtained from his
employer, Intel. The defense brought out that Goel filed false
tax returns unrelated to Rajaratnam and was therefore facing
prison time (he was later sentenced to two years of probation).
The only way out for these criminals caught red-handed, the
defense argued, was to testify against Rajaratnam.
13-5 The Verdict
After 12 days of deliberation, the jury found Raj Rajaratnam
guilty of all 14 counts of securities fraud and conspiracy. The
jurors later explained the length of their deliberation was
because some of them could not comprehend how such an
intelligent person could do something so destructive. Jurors
cited the recorded conversations between Rajaratnam and his
trading network as some of the most convincing evidence.
In total, the counts carried a potential maximum sentence of 205
years in prison, although Rajaratnam was actually only
sentenced to 11 years. In addition to his prison sentence, his
criminal penalties amounted to $63.8 million. Rajaratnam also
lost the SEC’s parallel civil lawsuit for insider trading and was
ordered to pay a record $92.8 million in damages, the largest
judgment ever imposed against one person in an SEC insider
trading case. He later agreed to pay an additional $1.45 million
to settle yet more civil charges. These various judgments added
up to over $158 million in total penalties.
Rajaratnam and his defense team swiftly appealed the criminal
conviction. Their argument centered on the aggressive
wiretapping the federal investigators had employed to gather
their evidence, a tactic never before used in an insider trading
case. The appeal stated that judicial permission to place these
wiretaps had been obtained deceptively in violation of
Rajaratnam’s constitutional rights, and thus the incriminating
recorded conversations should not have been usable by the
prosecution at trial. The federal court of appeals, however,
found Rajaratnam’s arguments “unpersuasive” and upheld his
conviction. The U.S. Supreme Court then declined to hear the
case, making Rajaratnam’s sentence final.

8. Rajaratnam appealed the $92.8 million civil fine, claiming it is
unfairly excessive and cumulative with the $63.8 million
criminal penalty. He also tried to appeal his conviction,
claiming that it had not been proven that benefits were passed
on to the tippers. A judge rejected his argument.
13-6 Rajat Gupta
Rajat Gupta was a man of high profile and influence with an
illustrious career, including a nine-year term as managing
director (CEO) of McKinsey & Co., a prestigious global
management consulting firm, and serving on the boards of
Goldman Sachs, Procter & Gamble, American Airlines, the
Rockefeller, and the Bill and Melinda Gates Foundation. Well -
known, well-respected, and considered a man of integrity, he
was esteemed throughout the financial services sector, as well
as in India for being the first Indian-born CEO of a
multinational corporation. This golden reputation came to an
abrupt end when he was charged and convicted of insider
trading activities in 2012.
The charges were based on the phone call he made to
Rajaratnam on September 23, 2008, regarding Berkshire
Hathaway’s purchase of Goldman Sachs stock. Immediately
after this phone call, Galleon made a significant purchase of
Goldman Sachs stock, turned a sizeable profit, and quickly
liquidated the stock. Because of this sequence of events, and
other similar incidents where Gupta contacted Rajaratnam just
prior to especially profitable trading decisions by Rajaratnam
and Galleon, Gupta was implicated in insider trading activity.
After less than a day of deliberation, the jury convicted him of
three counts of securities fraud and one count of criminal
conspiracy.
Rajat Gupta faced a maximum of 20 years for each fraud charge,
and five years for the conspiracy charge, but was only sentenced
to two years in prison, as well as fined a total of $24.9 million
in civil and criminal penalties.
Gupta’s appeal rested on the use of wiretap evidence that his
defense argued was hearsay and thus inadmissible at trial under

9. evidentiary rules. His lawyers also maintained there was no
evidence Gupta benefited in any way from giving the alleged
insider tips and that the conviction was based entirely on
circumstantial evidence. The appeal furthermore claimed the
defense team was prevented from presenting several pieces of
critical evidence, including that of Gupta’s nonculpable state of
mind, of the possibility that an alternative person had actually
provided the insider tips, and of Gupta’s integrity. Because the
court allowed the wiretap recordings but did not allow this
evidence, Gupta’s defense argued that he deserved a new trial.
Despite these arguments, the federal court of appeals upheld
Gupta’s conviction, and subsequently denied his petition for a
rehearing. Gupta tried to appeal to the U.S. Supreme Court, but
his request to remain free on bail during this appeal was denied,
and he reported to prison on June 17, 2014. Rajat Gupta has
since left prison and is seeking to reestablish his prominent
reputation. He continues to fight the charges, and in 2016 the
U.S. Second Court of Appeals agreed to reexamine its previous
rejection of Gupta’s appeal. Gupta’s lawyer argued that Gupta
did not receive any benefit from Rajaratnam for sharing
information with him.
Many consider Gupta’s conviction—considering his prominence
and influence—to be a powerful symbolic victory for federal
prosecutors and the SEC, sending a message to the financial
sector that no wrongdoer, no matter how powerful, is safe from
recrimination.
13-7 The Impact of the Galleon Case
The Galleon case is the largest investigation in history into
insider trading within hedge funds. Twenty-six people were
charged with fraud and conspiracy. Galleon closed in 2009 after
investors quickly withdrew over $4 billion in investments from
the company. In addition, over a dozen companies’ stocks were
traded based on allegedly nonpublic information (see Table 2).
These trades could have affected the financial status of the
companies, their stock prices, and their shareholders.
Table 2

10. Companies Affected by Galleon’s Alleged Insider Information
Network
3Com Corp
Advanced Micro Devices
Akamai Technologies
Atheros
Axcan Pharma
Goldman Sachs
Google
Hilton Hotels
IBM
Intel
Kronos
Marvell Technology Group
Polycom
Procter & Gamble
Sun Microsystems
The Galleon insider trading investigation was the first to use
wiretaps, which are normally only used to convict people of
involvement in terrorism, drugs, and organized crime. This set a
precedent for insider trading cases, and many suspect this
method may be used more frequently in the future. Because
investment firms rely on email, phone calls, and other digital
information, electronic surveillance will likely become the
technique of choice for white-collar crime investigators. Federal
authorities also hope the Galleon convictions will deter other
powerful investment managers from engaging in insider trading.
Manhattan U.S. Attorney Preet Bharara said, “Unlawful insider
trading should be offensive to everyone who believes in, and
relies on, the market. It cheats the ordinary investor. … We will
continue to pursue and prosecute those who believe they are
both above the law and too smart to get caught.”
13-8a Questions for Discussion
1. Are information-gathering techniques like Rajaratnam’s
common on Wall Street? If so, what could regulators, investors,
and executives do to reduce the practice?

11. 2. What are the implications of sharing confidential material
information? Is it something that would affect your decision
about how to trade a stock if you knew about it?
3. Do you think the secret investigation and conviction of
Rajaratnam and other people in the Galleon network will deter
other fund managers and investors from sharing nonpublic
information?