Galleon Group, the hedge fund at the center of a huge insider-trading case, appears to have been something of a swashbucklers’ haven when it came to compliance.
As its founder, Raj Rajaratnam, fights charges of illegal insider trading, details have emerged indicating that Galleon was out to sea in monitoring its top traders.
That includes Rajaratnam, as well as his former top tech portfolio manager, Ali Far, one of the cooperating witnesses aiding the far-reaching federal investigation.
The most obvious compliance no-no at Galleon appears to be Rajaratnam’s alleged meeting in 2005 with Roomy Khan, another key government informant.
In 2001 Khan, then an employee at Intel (NASDAQ:INTC), pleaded guilty in federal court to a charge of faxing “non-public and highly confidential information” about Intel’s pricing and sales data to Galleon. She was sentenced to six months home detention and ordered to pay $150,000 in fines and restitution, according to the San Jose Mercury News, which first reported on the eight-year-old case.
Now prosecutors claim that a person, believed to be Khan, provided a number of inside trading tips to Rajaratnam in 2006 and 2007. It simply boggles the imagination that Galleon’s compliance desk would risk letting Rajaratnam meet with a convicted felon (if, in fact, compliance knew about the meeting), let alone someone previously convicted of passing top secret information to his hedge fund.
Then there’s Far, once one of Rajaratnam’s top lieutenants at Galleon. Far is one of a handful of people cooperating with prosecutors, as first reported by The Wall Street Journal and corroborated by people close to Galleon.
Far would be in a good position to know a good deal about Rajaratnam given that he spent eight years at the New York-based hedge fund. It also appears that Far, who could not be reached for comment, was often flying under his own banner at Galleon.
In 2001, for instance, Far joined the board of a small publicly traded Florida company called Uncommon Media Group. Uncommon Media described itself as a “development-stage company focused on creating and delivering targeted advertising” using the Internet and CD-ROMs. Far served on Uncommon Media’s audit committee and received an option to purchase 100,000 shares as compensation for his services.
But Uncommon Media wasn’t just any fledgling company. It was a penny stock — not the kind of company you’d expect a high-flying tech money manager to get involved with.
Worse, soon after Far joined the board of Uncommon Media, the Securities and Exchange Commission filed a complaint, accusing the company and its chief executive, Lawrence Gallo, of taking part in a fraudulent stock scheme.
Federal prosecutors in Miami also filed criminal charges against Gallo. The civil and criminal charges arose from a joint two-year investigation by the SEC and the Federal Bureau of Investigations into dozens of penny stock fraud schemes in south Florida, an operation dubbed Bermuda Short.
Far, who has degrees in engineering, business and law, wasn’t charged in the matter. And there’s no indication he did anything wrong.
Still, it’s important to note that Far was on the prosecution’s witness list for Gallo’s trial. He never got a chance to take the stand because Gallo pleaded guilty on the eve of trial in 2004.
Far’s involvement with Uncommon Media isn’t simply a case of bad judgment. At most big hedge funds, what Far did could constitute a firing offense. That’s because portfolio managers are rarely allowed to sit on corporate boards.
The reason for the prohibition is obvious: serving on a corporate board can limit a hedge fund’s ability to trade certain stocks based on confidential access to inside information.
In fact, a person close to Galleon says the fund normally did prohibit portfolio managers from serving on corporate boards. The source went on to say that Galleon’s management wasn’t aware that Far sat on Uncommon Media’s board.
There’s more. In August 2004, Far formed a handful of private companies and limited partnerships in Texas that appear to have been for his own personal benefit.
It’s not clear what Far may have used the companies for — all but one of them is inactive now. Yet with names like Ormuzd Ventures LP and Zurathustra Ventures LP, the mysterious companies certainly sound as if they were intended as investment vehicles.
One thing is clear — if the partnerships were used for trading stocks, that would have set off red flags at most hedge funds and might very well have been prohibited. Ron Geffner, a lawyer who advises hedge funds, says most managers keep close tabs on any outside trading or investment by their portfolio managers.
The compliance officer should review those trades in an attempt to prevent portfolio managers from acting in a manner which would violate securities laws, such as preventing insider trading or front running.
Again, there’s no indication Far did anything wrong. And once again the person close to Galleon says the hedge fund wasn’t aware of the private partnerships and would have probably prohibited them.
Is it plausible that Galleon didn’t know about either Far’s involvement with Uncommon Media or the private partnerships in Texas? Sure. But that simply is more evidence of a big hedge fund taking a “don’t ask, don’t tell” approach to compliance.
After all, Far was one of Galleon’s bright stars. When he left the mothership in 2007 to start his own hedge fund with Choo-Beng Lee, formerly a trader with SAC Capital, Rajaratnam sunk money into the new fund, Spherix Capital of San Jose, California. Clearly, Far left Galleon amicably.
If the case against Rajaratnam comes to trial, his defense lawyers may want to use some of the things that Far did while at Galleon to undermine his credibility as a possible witness.
But I’m not sure how much of a defense that really is. In essence, it would be tantamount to saying that compliance at Galleon was AWOL — meaning anything was possible.