Good afternoon. My name is Robert Khuzami, and I’m the Director of the SEC's Division of Enforcement.
I appreciate this opportunity to join my former colleagues at the U.S. Attorney’s Office here in the Southern District of New York, and the great agents and supervisors of the FBI, to announce what we believe to be the biggest hedge fund insider trading case ever brought.
What we have uncovered in the trading activities of Raj Rajaratnam and his multi-billion dollar hedge fund advisory firm 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.
He is not a master of the universe.
Instead, Raj Rajaratnam is a master of the rolodex.
As we allege in our civil complaint filed today, Rajaratnam embarked on a deliberate and systematic use of inside information to inform his trading decisions.
It was, for all practical purposes, his business model.
He cultivated a network of high-ranking corporate executives and insiders, and then tapped into his rolodex to obtain confidential details about quarterly earnings and takeover activity involving such well-known companies as Google, Hilton, Intel, Polycom, Akamai Technologies, and AMD.
He then used his unfair advantages to trade on behalf of Galleon to the tune of millions of dollars in illicit profits.
Not only did Rajaratnam repeatedly attack the basic principles of fairness that underlie the functioning of our markets, but so did the hedge fund consultant, hedge fund general partner, and three high-ranking corporate executives and insiders who we charge today for enabling his deceitful conduct.
As tippers, we allege the senior executives of highly reputable companies stole this valuable, not-yet-public information relating to earnings guidance and corporate transactions, information that they knew belonged to their companies and shareholders, and which they knew they had a duty not to use for their own illicit purposes.
But they disregarded those duties and stole information in exchange for some benefit, monetary or otherwise, bestowed upon them by Rajaratnam.
They put greed and personal interest above the interests of the shareholders they were obligated to serve.
The involvement of hedge funds and their principals, consultants, and portfolio managers, in this case is of particular concern.
Hedge funds play a dominant role in today’s markets.
They are responsible for massive trading volumes, and operate as intermediaries in the marketplace, thus filling a role historically played by more highly-regulated broker-dealers.
They use highly-sophisticated trading technologies across multiple markets and products, including derivatives for which there is often little transparency.
We at the SEC are committed to pulling back the curtain on hedge fund operations and taking a close look at their activity. We are developing a variety of initiatives to do that involving greater specialization and expertise, improved technological tools to track and analyze trading, better coordination among regulators and law enforcement, new legislative initiatives, and other means to address these areas.
It would be wise for investment advisers and corporate executives to closely look at today’s case, their own internal operations, and the increasing focus and scrutiny on hedge fund trading activity by the SEC and others, and consider what lessons can be learned and applied to their own operations.
I want to conclude by thanking Preet Bharara, Ray Lohier and their team at the U.S. Attorney’s Office who have worked tirelessly to build an impressive criminal case against the defendants.
I also want to thank the talented FBI agents and supervisors for their close collaboration with the SEC.
Lastly, I want to recognize the hard work, talent and dedication of the SEC staff who conducted this lengthy and incredibly intricate investigation. The fact that this kind of commitment and hard work is necessary in law enforcement, and goes hand-in-hand with the job, does not make it any less worthy of mention. Their effort was superlative.
The SEC personnel are:
Our law enforcement agencies are together much more than the sum of our parts. That is why coordination, of which today’s actions are a prime example, is critically important to the goal of rooting out fraud and misconduct in our markets. The investing public deserves no less, and we will deliver.
Thank you.
See also: Press Release No. 2009-221
http://www.sec.gov/news/speech/2009/spch101609rk.htm