In Re the Raj Investigation, Did the Feds Pull a Madoff?

[WSJ Law Blog]

It’s now a near legendary tale: SEC lawyers, prompted by calls by do-gooder Harry Markopolous, looked into Bernie Madoff years ago, but failed to nab him.

A similar story has now surfaced in regard to hedge-fund mogul Raj Rajaratnam, who was charged with insider-trading related securities fraud in October. According to this piece, by WSJ reporters Justin Scheck, Robert Guth and Ben Charny, federal prosecutors investigated Rajaratnam on suspicions of insider trading more than 10 years ago. Prosecutors, however, were unable to prove their suspicions, which centered on information stolen from Intel.

The probe was described in a sentencing recommendation involving an Intel employee who pled guilty to wire-fraud charges in 2001. The former Intel employee, Roomy Khan, is also known as “Tipper A” in the government’s current insider-trading case against Rajaratnam. Khan is a cooperating witness in the government’s current case and has agreed to plead guilty to insider trading, conspiracy and obstruction of justice charges in hopes of a lighter sentence. As part of her cooperation, Khan agreed to consensual recordings of her conversations with Rajaratnam, evidence that the government will attempt to use in its case against Rajaratnam.

In response to executives’ concerns, the document says, Intel “began a monitoring program to determine whether anyone at Intel was dialing Rajaratnam’s number.” They learned that Khan dialed it several times and sent faxes to Galleon as well.

Afterward, the document says, “Intel set up a hidden videocamera at the fax machine” that on March 6, 1998 recorded Ms. Khan faxing key financial documents to Mr. Rajaratnam. The documents contained pricing information for key Intel chips as well as the number of units sold in the first quarter of 1998, the document says. “By multiplying those numbers, one can determine Intel’s total revenue for the quarter,” the court filing says.

The earlier investigation into Rajaratnam stemmed from suspicions that arose in the 1990s within microchip giant Intel that Rajaratnam, then a stock analyst with investment bank Needham & Co., was receiving tips from an Intel insider. Rajaratnam left Needham in late 1996 to form his hedge fund Galleon Group.

But ultimately, federal prosecutors were unable to do anything with the information. As of 2002, prosecutors wrote that they were continuing their probe of Rajaratnam, but meeting limited success. “After an exhaustive analysis of the labyrinth of accounts associated with Galleon, however, the SEC/FBI has not been able to show that any Galleon trade resulted from Rajaratnam’s possession of the information stolen for him by Kahn [sic] from Intel.”