The Missing Pieces in Galleon's Puzzle

Matthew Goldstein Reuters November 6, 2009

Think of the Galleon Management insider trading case as a puzzle with several pieces left to be snapped into place by federal authorities.

Prosecutors and securities regulators appear to have already put together the big pieces with last month’s arrests of former Galleon co-founder Raj Rajaratnam and two executives from a former Bear Stearns hedge fund.

Another round of criminal charges may show just how far the outer boundaries of the Galleon puzzle extend. Federal authorities are trying to determine whether other hedge fund managers traded on the same kind of top-secret corporate information that prosecutors say Rajaratnam and former Bear fund managers Mark Kurland and Danielle Chiesi trafficked in. All three are contesting the charges.

The new charges may come fairly soon, say a number of defense lawyers close to the investigation.

At least five people not named as one of the initial six defendants in the biggest insider trading case in two decades have retained lawyers in the wake of the arrests, these lawyers say.

A lawyer with the Securities and Exchange Commission Wednesday seemed to confirm that development when she told Judge Jed Rakoff that there was a “real possibility” of regulators adding additional defendants to a related civil lawsuit.

So far, federal authorities have portrayed a complex multi-year scheme, contending that Rajaratnam, Kurland and Chiesi traded on corporate secrets about upcoming deals or earnings news. The information, prosecutors say, was passed onto the hedge fund managers by executives at tech heavyweights like Advanced Micro Devices, IBM, and Akamai — some of whom have also been charged.

For law enforcement, the Galleon case is an important puzzle to complete. But that’s not just because authorities brought charges against a high-profile hedge fund titan like Rajaratnam.

Rather, in Galleon, prosecutors and securities regulators think they have finally penetrated the thick cloak of secrecy that surrounds the hedge fund world and found a vast web of illicit information horse-trading.

But charging executives from just two hedge funds — even one as big as Galleon once was — doesn’t prove that such practices are in any way endemic to the industry.

That’s why federal authorities are working hard to see if the Galleon net can be spread far enough to catch others in the hedge fund world.

Three other hedge funds may have attracted attention: Spherix Capital, Quadrum Capital and Trivium Capital.

All three funds ceased operation in the past year and none was ever as big or as well-known as Galleon. The funds are drawing scrutiny largely because each had either direct or indirect ties to Roomy Khan, Ali Far and Choo Beng Lee — the three widely believed to be cooperating with the investigation, according to lawyers and others close to the investigation.

In a related development, prosecutors in a court filing Wednesday confirmed that there is “more than one cooperating witness against the defendant” in addition to Khan.

Far and Lee were the co-managers of Spherix, which shut down in March without explanation, even though its Elliptical series of funds had performed well, people close to Spherix say. The two men started the San Jose, California fund in 2007 shortly after Far left Galleon, where he had been one of Rajaratnam’s top lieutenants.

People close to Galleon say Far left on good terms and Rajaratnam even invested money in his hedge fund.

Now people close to Galleon say they are surprised to learn that while at Galleon, Far served on the board of a penny-stock company that got busted in a securities fraud operation. These same people also say they never knew Far formed a number of private partnerships in Texas that appear to have been intended as investment vehicles.

Khan is now known as the hedge fund manager wannabe who was convicted nearly a decade ago on federal charges of passing “highly confidential information” about Intel to Galleon. She is believed to have passed on several inside trading tips to Rajaratnam in 2006 and 2007 before beginning to cooperate with authorities in the current investigation.

Khan and Far seem to have crossed paths at Galleon when both were working for the fund on the West Coast at the start of the decade. For a time, Khan and Far were the sole Galleon employees in the hedge fund’s California outpost, say people close to Galleon.

Khan mostly recently served as a consultant to Trivium Capital, a one-time $900 million hedge fund that closed last December after steep market losses. A person answering a phone at Trivium’s New York office declined to comment beyond pointing out that Khan was never a full-time employee of the hedge fund.

One of Trivium’s co-founders, Robert Feinblatt, didn’t return a phone call seeking comment.

Quadrum, meanwhile, appears to have attracted attention because its founder, Richard Grodin, once worked with Spherix’s Lee at another hedge fund. Quadrum ceased operations a few weeks before federal authorities announced the arrests in the Galleon case.

Like Spherix, Quadrum shuttered its operation without warning and explanation — even though it too had posted positive returns for the year. The Wall Street Journal reported that authorities served a subpoena on Quadrum seeking information about its trading activities.

A person answering the phone at Quadrum’s New York office declined to comment and referred all inquiries to its attorney, Kevin Harnisch, a partner with Fried Frank. Harnisch, who specializes in securities enforcement cases, didn’t return phone calls and emails seeking comment.

There’s another thing that also ties Lee, Grodin and Feinblatt together — all three are alums of Steve Cohen’s SAC Capital, one of the most powerful hedge funds in the world.

But all three men left SAC years ago, and there’s no indication the authorities are looking into any of SAC’s trading activities.

And there is no indication that the three men are among those who could soon be charged in the case.

Indeed, no charges may ever be filed against anyone associated with Spherix, Quadrum or Trivium. There’s no criminal charge for simply being within six degrees of separation of a scandal-tarred hedge fund manager.

It’s possible that some of the puzzle pieces the authorities are looking at simply don’t fit.

The Missing Pieces in Galleon's Puzzle

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