Insider Trading Scandal Rattles Silicon Valley and South Asia

Two prominent Indian-Americans, along with a Sri Lanka born billionaire, have been charged in what U.S. prosecutors say is the biggest insider-trading case in a generation. The scandal is now reverberating in South Asia, particularly the island nation of Sri Lanka.

It is estimated that billionaire Raj Rajaratnam, the founder of hedge fund Galleon Group under arrest in New York on charges of insider trading, has invested more than $150 million in Sri Lankan shares. Even rumors of his trades can send the market up or down. Born in Sri Lanka, he was educated at the prestigious Wharton business school in Pennsylvania and went to set up a hedge fund for boutique investment bank Needham. The hedge fund was spun off with Mr Rajaratnam at its head in 1997. Galleon was well known for its extensive research reports, according to the New York Times, and for having many senior technology executives as its investors.

In 2007, there was a minor scandal involving accusations of insider trading against Pakistani-American Atiq Raza, but it was settled out of court with the SEC when Mr. Raza agreed to pay $3 million fine. Under the terms of the agreement, Mr. Raza was also barred from serving as an officer or director of a public company for five years, and he was permanently enjoined from future violations of the federal securities laws.

The Wall Street Journal reports that fears about the future of Rajaratnam's and Galleon's investments in Sri Lanka caused a major selloff Monday. After losing about 3% during early trading, the Colombo Stock Exchange benchmark All-Share Price Index ended the day at 3082.91, down 1.6%. Shares in which Mr. Rajaratnam or Galleon hold major stakes were among the biggest losers.

Mr Rajaratnam is estimated to be worth about $1.3bn by Forbes magazine. Galleon, the hedge fund he founded, had managed up to $7bn in assets. He was investigated by the Federal Bureau of Investigation in 2007 for allegedly funding the Tamil Tiger rebel movement in Sri Lanka, the Central Bank of Sri Lanka said on Monday.

He was among several wealthy Sri Lankans who donated to the US-based charity, the Tamil Rehabilitation Organization, which may have been funneled to the Tamil Tigers.

In addition to Sri Lankan Raj Rajaratnam, 52, the accused include two Indian-Americans, Rajiv Goel, 51, of Los Altos, of Intel's treasury department, and Anil Kumar, 51, of Santa Clara, an executive at the global consulting group McKinsey & Co. Both were rising stars in the high-tech constellation of Silicon Valley. Locally established and internationally connected, the two men's work and reputations stretched to India and back, as they moved in the rarified air of global big business, according to a report in San Jose Mercury News. Kumar and Goel are both charter members of TIE, the Indus Entrepreneur, an organization of mostly Indian-Americans in Silicon Valley.

Goel and Kumar supplied information about their portfolio firms or clients to co-conspirators, according to the complaint, who in turn made profitable trades. Kumar was arrested in New York, then later released on a $5 million bond, while Goel appeared briefly before a federal judge in San Francisco Friday before reportedly posting a $300,000 cash bail and a $100,000 bond. Both of them have been put on leave by their respective firms. The investigation is likely to lead to insiders at several other firms beyond Intel, IBM and McKinsey.

In India, where Kumar had been heavily involved in the Indian School of Business, embarrased officials announced he had voluntarily taken an indefinite leave of absence from the board because of the scandal.

And like Kumar, Goel's Indian roots were deep. Before joining Intel, he worked in finance for one of India's largest business house, the Aditya Birla Group. With an MBA from the Wharton School, he also served as a corporate banker with Bank of America in San Francisco and managed a large portfolio of securities for Metropolitan Life out of New York, according to Mercury News.

The lead prosecutor Preetinder S. Bharara, the US Attorney for the Southern District of New York, also of Indian descent, said “This is not a garden-variety insider trading case." He alleged that the scheme made more than $20 million in illegal profits since 2006. According to the NY Times, Bharara, 40, was born in Ferozepur, India, and he was an infant when his parents immigrated to the United States in 1970. He grew up in Monmouth County, N.J., and graduated from Harvard in 1990 and Columbia Law School in 1993. A rising star in the Democratic Party, Bharara supervises over 200 lawyers who prosecute high-profile cases in New York City.

There have been other recent white collar crime cases against Indian-Americans. Earlier this month, an Indian-American lawyer in Los Angeles, Sandeep Baweja, 39, agreed to plead guilty to two felony charges relating to a scheme where he took more than $2 million awarded in a class action suit and lost it all on the stock market.

Last year, Vijay Taneja, an Indian-American investor and producer of Bollywood movies, was convicted of mortgage fraud in the United States.

This is, indeed, a sad day for many people of South Asian descent in the United States, particularly in Silicon Valley. Let's hope the accused receive a fair trial amidst the wave of negative publicity surrounding the case.


Related Links:

Haq's Musings

Atiq Raza Pays Fine, Settles Insider Trading Charges

US Mortgage Fraud Funds Bollywood

Insider Scandal Hurts Sri Lanka Stocks

Murder-Suicide in Silicon Valley

Bigotry Bedevils Silicon Valley Eatery

Pakistani-American: Mr. Thirty Percent of Silicon Valley

Comments

Riaz Haq said…
Here are some tidbits of gossip by Galleon scandal defendants caught on tape and reported by WSJ:

During the July 29, 2008, call, Messrs. Rajaratnam and Gupta deride Mr. Kumar's aptitude for doing investment deals. "I'm getting a feeling that he's trying to, just...be a mini-Rajat, right?" Mr. Rajaratnam says on the tape. "Without bringing anything new to the party, right?"

"Yeah, yeah," says Mr. Gupta, who previously oversaw Mr. Kumar as managing director at McKinsey.

Mr. Kumar had testified that Mr. Rajaratnam had given him more than $2 million through offshore accounts for inside information on McKinsey clients.

"Honestly, Rajat, I'm giving him a million dollars a year for doing literally nothing," Mr. Rajaratnam tells Mr. Gupta on the July 2008 call.

"I think you're being very generous," Mr. Gupta replies. "But he should sometimes say thank you for that, you know?"

In the same conversation, Mr. Gupta called fellow Goldman directors "an opportunistic group," saying that though they believed commercial banking was a low-return business, they might buy Wachovia Corp. if it were "a good deal."

At other times, Mr. Rajaratnam turns around and talks about Mr. Gupta. In a May 28, 2008, call, Mr. Rajaratnam gossiped with Mr. Kumar about how Mr. Gupta had overextended himself with corporate board positions and other responsibilities.

"You know that his family suffers," Mr. Rajaratnam says on the tape. "I asked him, 'So are you outsourcing your wedding or how are you doing it?'" Mr. Gupta's daughter was married a few months later, according to online photos of the event.

In an Aug. 15, 2008, call, Mr. Kumar speculates that Mr. Gupta is being "greedy" by pursuing a possible job at a private-equity firm run by wealthy investor Henry Kravis, so he can be "in that circle."

"That's a billionaire circle, right?" asks Mr. Rajaratnam. "Goldman is like the hundreds-of-millionaires circle." Mr. Rajaratnam then suggests Mr. Gupta wants to make $100 million "without doing a lot of work."

Messrs. Rajaratnam and Kumar also speculate about Mr. Gupta's "personal family crisis," and discuss his wife's unhappiness with his travel schedule and gossip about another couple's marriage as they make plans to meet for dinner at Manhattan's posh Nobu restaurant.
Riaz Haq said…
Here's a Time magazine piece on how big Wall Street investment banks are claiming the lion's share of mathematicians and scientists to create exotic financial products:

Ever wonder how investment bankers, a breed known in the past more for its social skills and golf handicaps than for its mathematical prowess, ever invented products like those crazily sophisticated, synthetic collateralized debt obligations that brought down the financial system? Well, they didn't. They hired rocket scientists to do that--a whole lot of them. In fact, Wall Street hires more math, engineering and science graduates than the semiconductor industry, Big Pharma or the telecommunications business. As one mathematician-turned-trader friend recently put it to me, why should he work on new high-tech products at Bell Labs when he could make five times as much crafting 12-dimensional models of the stock-buying and -selling behaviors of average Joes for a major global-investment house, which could then turn around and make massive profits by betting against those very patterns?

It's a question that's right at the center of the debate over the U.S.'s economic future. After the financial crisis, the banking industry secured massive bailouts by convincing us all that Wall Street was the grease on the wheels of the real economy. Banks provided the capital to create new businesses, after all, and if they weren't healthy, nobody else could be either. Of course, that position has become harder to defend as lending rates to new businesses have contracted post--financial crisis and economic growth has remained sluggish even as bailout money has ensured that Wall Street would mushroom in size. Amazingly, three years after the crisis, the percentage of the U.S. economy represented by the financial sector remains at historic highs of over 8%.

Now there's even more compelling historical evidence that Wall Street's favorite argument doesn't hold water. A new study from the Kauffman Foundation, a Kansas City, Mo.--based nonprofit that researches and funds entrepreneurship, has found that over the past several decades, the growth in size and importance of the financial sector has run in tandem with lower--not higher--rates of new-business formation. In the 1980s, when Wall Street really took off, the number of new firms created fell, and in the 1990s, it plateaued and has been stagnant ever since. Basically, the facts show the opposite of what Wall Street would have us believe. A number of factors explain that, but one of the most important, argue the study's authors, is that the financial sector is sucking talent and entrepreneurial energy from more socially beneficial sectors of the economy.


Read more: http://www.time.com/time/magazine/article/0,9171,2061220,00.html#ixzz1Hr1jAxuk
Riaz Haq said…
Here's WSJ on Silicon Valley VC gender bias trial:

A decade after hiring Ellen Pao as his technical chief of staff, prominent venture capitalist John Doerr faced her in court Tuesday, defending Kleiner Perkins Caufield & Byers against Pao’s claims of sex discrimination and retaliation.

In more than five hours of testimony, Doerr retraced Pao’s trajectory through Kleiner Perkins, from a staffer who described herself as his “surrogate daughter,” to a disgruntled junior partner who felt she was repeatedly snubbed for promotions and choice assignments.

With Pao’s mother watching from the front row, Doerr said he wanted Ajit Nazre, a Kleiner Perkins partner who engaged in a consensual affair with Pao in 2006 to be fired. The trial is taking place in San Francisco Superior Court.

Doerr said he ultimately agreed that Nazre not be fired because other partners wanted to keep him and because Pao and Nazre said they could work together.

“You relented,” Pao’s attorney, Alan Exelrod, said. “That was a factor,” Doerr said. But, he added, the firm told Nazre, “if he did this again he’d be terminated.”

Kleiner Perkins partners reduced Nazre’s bonus in 2007 as punishment for the affair. “But his biggest punishment was that I told him I’d lost confidence in his ability to be a leader of the firm, and he’d have to regain that confidence,” Doerr told Exelrod.

The following year, Nazre was promoted to senior partner, even though Doerr said he had reservations about Nazre’s trustworthiness. “I don’t remember how I voted, but the partnership voted, and [Partner Emeritus] Ray Lane was a strong supporter,” Doerr said.

Doerr hired Pao in 2005 as part of what Doerr called “Team JD,” which meant she helped him manage his time. Early on, he gave her advice on areas where the firm though she could improve. Pao tended to be dismissive and had conflicts with other partners, Doerr said, including with another female partner, Trae Vassallo.

Nonetheless, he praised her work. “You have contributed extensively and I’m delighted that you chose to join KPCB,” her first review said.

After a couple of years, Pao became less happy at the firm and talked to Doerr about leaving. She offered suggestions on ways that Kleiner Perkins could improve. “Honesty with partners,” was one suggestion, according to a document shown in court. “Quality in our work” was another.

In June 2007, Pao told Doerr about the affair with Nazre. She also complained that a third partner, Randy Komisar, had given her a book of poetry on Valentine’s Day and asked her out to dinner when his wife was out of town.

Doerr told Exelrod that it was common to give gifts at the firm and he didn’t ask why Pao would be upset about the book.

In 2009, he still thought highly enough of her that he thought the firm should work hard to keep her when she got an offer from a rival firm, Google Ventures GOOGL -1.08%.

She would be given “more carry, comparable income and be given more responsibility in a lesser firm, and if I were them I would seize the opportunity to hire her,” he wrote in an e-mail to partners Ray Lane and Ted Schlein.

Schlein offered Pao a position on the digital investing team and she decided to stay at Kleiner Perkins. But problems developed there too. Pao had urged Kleiner Perkins to invest in patent firm RPX, which it did. But the board seat, which Ms. Pao wanted, went to Komisar.

“Did you tell her that Randy needed a win?” Exelrod asked Doerr.

“I told her her job as a junior partner was to support the KP team and Randy and if she couldn’t do that she should do something else,” Doerr said.

“Didn’t you say he needed a win?” Exelrod asked.

“Randy and Kleiner needed a win. Everybody needs wins. I could use some wins,” said Doerr, with a smile.

Doerr said he introduced Pao to his family, met her family, coached her and hired coaches for her, including a speech coach so she could learn to communicate better with other partners and advance her ideas.

http://blogs.wsj.com/digits/2015/03/03/as-pao-case-continues-john-doerr-confronts-surrogate-daughter/

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