Oct. 20, 2009 -- The indictment of a New York billionaire for allegedly operating the largest ever insider trading scheme involving a hedge fund last week, is a signal that regulators are taking a more aggressive tack in hunting down illegal activity on Wall Street, former SEC officials say.
Raj Rajaratnam, head of the Galleon Group hedge fund, along with five others stand accused by prosecutors and the SEC of earning more than $25 million in profits by using illegally obtained information to make trades of stock in companies, including Google Inc., Clearwire Corp., and Hilton Hotels Corp., court documents show. The Sri Lanka-born Rajaratnam, who established Galleon in 1997, is free on $100 million bail and his travel is restricted to within 110 miles of New York City.
Federal prosecutors leveled a number of charges against Rajaratnam, including securities fraud and conspiracy to commit securities fraud. Jim Walden, an attorney for Rajaratnam, said his client is innocent, the Associated Press reported.
The tactics used to build this case – including the use of undercover informants and wire taps show the SEC, still reeling from its failure to detect massive fraud in the Bernard Madoff and Allen Stanford scandals, is going to new lengths to uncover criminal activity on Wall Street.
"This is consistent with the overall more aggressive posture that the SEC is taking," said Michael MacPhail a former SEC branch chief who is now a partner at Denver-based Holme Roberts & Owen. "It looks like they had an informant that was helping the government to gather evidence against these people. And for the SEC to be quoting conversations and things like that... that could be a departure from the way the SEC used to do business."
This case marks the first time court-authorized wiretaps were used in a hedge fund case. Experts say the tactics used in this investigation may be a harbinger of things to come under the watch of new SEC enforcement chief Robert Khuzami, a former federal prosecutor who took over the post in February.
"As somebody who's involved in the securities business, we've been waiting a while now for this to happen. I tell clients who've done anything wrong... the SEC is going to be really difficult and really tough, and they're going to take no prisoners," said one former SEC attorney, who now represents clients in enforcement cases.
Khuzami Leads Following Madoff Blowout
Experts say SEC chairman Mary Shapiro had this in mind last February when she named Khuzami the agency's director of enforcement. Before taking that post, Khuzami spent 11 years as an assistant federal prosecutor in the Southern District of New York. During his tenure, Khuzami snagged a 30-year conviction of financier Patrick Bennett for running a $1 billion Ponzi scheme.
His predecessor, Linda Thomsen, resigned in February amid intense criticism after failing to uncover Madoff's $50 billion fraud despite numerous opportunities.
"It's a wakeup call to everybody as to the SEC's aggressiveness in this area," said Barry Barbash, a partner at Wilkie Farr & Gallagher in Washington, and former head of the SEC's investment management division. "The industry is generally going to be wary now, or more wary that the SEC is out there."
With the new government fiscal year underway as of Oct. 1, Khuzami is likely aiming to assert himself, meaning the Galleon case might be the first of a string of new fraud cases, said Jacob Frenkel, a partner at law firm Shulman Rogers Gandal Pordy & Ecker in Potomac, Md., and a former attorney in the SEC's enforcement unit.
"This is the first full U.S. government year for the new sheriffs to strut their stuff. I think we're going to see them very aggressive."