Raj Rajaratnam’s younger brother was indicted on charges of conspiring in the insider-trading scheme for which the founder of the Galleon Group hedge fund was convicted nearly two years ago, U.S. prosecutors announced on Thursday.
Prosecutors said Rengan Rajaratnam, 42, conspired with his older brother to trade on non-public information concerning Clearwire Corp. and Advanced Micro Devices Inc. in 2008.
Rengan Rajaratnam was a portfolio manager at Galleon, and the trades for which he was charged resulted in nearly $1.2-million (U.S.) illegal profit, according to U.S. Attorney Preet Bharara in Manhattan, who announced the charges.
Rengan Rajaratnam was charged with six counts of securities fraud and one count of conspiracy, and faces up to 20 years in prison on each of the fraud counts. He has not been arrested. He is not in the United States and is believed to be in Brazil, a person familiar with the matter said.
David Tobin, a lawyer for Rengan Rajaratnam, did not immediately respond to a request for comment.
The charges arise from a broad U.S. government crackdown on insider trading. Since October 2009, seventy-seven people have been charged by Mr. Bharara’s office in that probe, and 71 have been convicted. The FBI and U.S. Securities and Exchange Commission are still investigating.
Raj Rajaratnam, 55, received an 11-year prison sentence in October 2011 after a jury had convicted him the previous May.
He is appealing his conviction, as well as the government’s use of wiretaps to obtain it. Wiretap evidence was also used in the case against Rengan Rajaratnam.
“Rengan Rajaratnam and his brother shared more than DNA,” Mr. Bharara said in a statement. “They also shared a penchant for insider trading.”
The SEC filed separate civil charges against Rengan Rajaratnam, whose full first name is Rajarengan.
The SEC lawsuit alleges a broader scheme that netted $3-million in illicit gains for Rengan Rajaratnam and hedge funds he managed following trades on stocks including Polycom Inc. and Hilton Hotels.
The Polycom trade took place in January 2006 when Rengan Rajaratnam was a portfolio manager at Sedna Capital Management, which he founded in 2004.
Before founding the firm, he worked briefly at Steven Cohen’s SAC Capital Advisors LP as an analyst, the SEC said.
Some of the allegations in the criminal case relate to activity that prosecutors said took place in March 2008. That made it an imperative to bring securities fraud charges on those allegations now, because of a five-year statute of limitations.
Thursday’s charges focus on two particular instances of Mr. Rajaratnam obtaining inside information.
The first came in March 2008 after Rajiv Goel, then an executive at Intel Corp., told Raj Rajaratnam about Intel’s plans to make a $1-billion investment in Clearwire.
After a news report describing some details of that transaction surfaced, the younger Rajaratnam allegedly said on a phone call to his brother that the “Clearwire stuff ... just hit.”
“So, I don’t know how much you got in today, but I think (Clearwire’s share price) is gonna rip tomorrow,” Rengan Rajaratnam said, referring to Raj Rajaratnam’s Clearwire purchases that day and the possible direction of its stock price the next day.
Prosecutors said Rengan Rajaratnam earned $101,070 from Clearwire trades in his personal brokerage account, while two Galleon funds he oversaw earned a combined $1.08-million.
Mr. Goel co-operated with prosecutors in the probe. He pleaded guilty to conspiracy to commit securities fraud in 2010 and was sentenced in September to two years probation.
The second instance concerned information received from former McKinsey & Co. director Anil Kumar, who was sentenced to two years probation last July following an earlier guilty plea to securities fraud charges.
Prosecutors said that in August 2008 Mr. Kumar told Raj Rajaratnam about a deal between McKinsey client AMD and two investment companies owned by the Abu Dhabi government, and that three hours later Raj Rajaratnam advised his brother about it.
They said that after Raj Rajaratnam bought 3 million AMD shares for a hedge fund he managed and 250,000 shares for a fund his brother managed, Rengan Rajaratnam told his brother by phone that another McKinsey partner “spilled his beans” and “volunteered the information about the investments” in AMD.
The other McKinsey partner is David Palecek, according to the SEC complaint. He died in 2010.
Catherine Redlich, a lawyer who represented Mr. Palecek in the investigation, in an e-mail said “there is no proof David ever agreed to provide inside information to the Rajaratnams and no proof that he received money or other benefits from them for doing so.”
A representative for McKinsey did not immediately respond to a request for comment.
Former McKinsey chief Rajat Gupta is separately appealing his conviction and two-year prison term for feeding information to Raj Rajaratnam that he had learned from board meetings at Goldman Sachs Group Inc., where he had been a director.
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