The US Securities and Exchange Commission has charged billionaire Raj Rajaratnam and his New York-based hedge fund advisory firm Galleon Management LP with engaging in a massive insider trading scheme involving IBM and Intel.

The scam allegedly generated more than $US25 million in illicit gains.

The commission’s complaint was filed in a federal court in Manhattan, and alleges Mr 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.

Mr Rajaratnam is alleged to have used the non-public information to illegally trade on behalf of his hedge-fund firm Galleon.

The commission’s chairman Mary L Schapiro said: “This complaint describes a web of fraud that has been unravelled."

The commission’s director of division enforcement Robert Khuzami added: “What we have uncovered in the trading activities of Mr Rajaratnam is that the secret of his success is not genius trading strategies. He is not the astute study of company fundamentals or marketplace trends that he is widely thought to be.

“Mr Rajaratnam is not a master of the universe, but rather a master of the rolodex. He cultivated a network of high-ranking corporate executives and insiders, and then tapped into this ring to obtain confidential details about quarterly earnings and takeover activity.”

In addition to Mr Rajaratnam and Galleon, the commission last week filed charges against the following:

• Danielle Chiesi, a portfolio manager at New Castle Funds,
• Rajiv Goel,  a managing director at Intel Capital (an Intel subsidiary),
• Anil Kumar,  a director at McKinsey & Company,  
• Mark Kurland,  a senior managing director and General Partner at New Castle,
• Robert Moffat,  a senior vice president at IBM,   
•  and New Castle Funds LLC — a New York-based hedge fund.

According to the commission’s complaint, Mr Rajaratnam and Galleon traded on insider information about the following events or transactions:

An unnamed source, identified in the commission’s complaint as Tipper A, allegedly obtained inside information about earnings announcements at Polycom and Google, as well as a takeover announcement of Hilton. Tipper A then allegedly provided this information to Mr Rajaratnam, who used it to trade on behalf of Galleon.       

Mr Goel (a managing director at Intel Capital, an Intel subsidiary) is accused of providing inside information to Mr Rajaratnam about certain Intel quarterly earnings and a pending joint venture concerning Clearwire, in which Intel had invested. Mr Rajaratnam allegedly then used this information to trade on behalf of Galleon.

As payback for Mr Goel’s tips, Mr Rajaratnam, (or someone acting on his behalf) is accused of executing trades in Mr Goel’s personal brokerage account based on inside information concerning Hilton and PeopleSupport, which resulted in nearly $US250,000 in illicit profits for Mr Goel. 

Mr Kumar (a director at McKinsey & Company) is accused of obtaining inside information about pending transactions involving AMD and two Abu Dhabi-based sovereign entities, which he shared with Mr Rajaratnam. He allegedly then traded on the basis of this information on behalf of Galleon.     

Mr Chiesi (a portfolio manager at New Castle Funds) is accused of obtaining inside information from an executive at Akamai Technologies and traded on the information on behalf of a New Castle fund, netting a profit of approximately $US2.4 million. Mr Chiesi allegedly also passed on the inside information to Mr Rajaratnam, who then traded on behalf of Galleon.

The commission also alleges that Mr Moffat (a senior vice president at IBM) provided inside information to Mr Chiesi about Sun Microsystems. Mr Moffat allegedly obtained the information when IBM was contemplating acquiring Sun. Mr Chiesi then allegedly traded on the basis of this information on behalf of New Castle, making approximately $US1 million in profits.

The commission’s complaint charges each of the defendants with violations of Section 10(b)-5 of the Securities Exchange Act, except for Mr Kumar and Mr Moffat, who have been charged with violations of Section 17(a) of the Securities Act.

The complaint seeks a final judgment permanently enjoining the defendants from future violations of the above provisions of the federal securities laws, ordering them to surrender the funds, and pay prejudgment interest, and pay financial penalties.

The complaint also seeks to permanently prohibit Mr Goel and Mr Moffat from acting as an officer or director of any registered public company.

The defendants have not yet entered a plea.