After the bailouts, the bonuses and the meltdown, Wall Street has another embarrassment on its hands - an alleged vast web of insider trading involving some of the biggest names in the investment business.
U.S. authorities Friday arrested billionaire hedge fund manager Raj Rajaratnam, founder of New York-based Galleon Group, at his Manhattan apartment, fingering him as the leader of an alleged ring of individuals who swapped inside information for cash and favours via cellphones and text messages.
The case reinforces the perception that Wall Street is a place where well-connected insiders game the system and prosper, leaving small investors stuck with the losses when markets falter.
The alleged conspiracy involved insiders at major public companies, media relations companies, venture capitalists, management consultants and some of the most widely traded U.S. stocks, including Google, Advanced Micro Devices and Hilton Hotels.
U.S. Attorney Preet Bharara told reporters it was the largest hedge fund case ever prosecuted and marked the first use of court-authorized wiretaps to capture conversations by suspects in an insider trading case.
Wiretaps are commonly used in drug and Mafia-related cases.
"Greed is not good," Mr. Bharara said. "This case should be a wakeup call for Wall Street."
Mr. Rajaratnam, 52, faces 13 counts of conspiracy and securities fraud. The civil complaint alleges that he pocketed roughly $20-million (U.S.). Prosecutors said he was preparing to fly to London and Switzerland when he was taken into custody.
Also charged in the case are money manager Mark Kurland, president of New Castle Partners; former Bear Stearns executive Danielle Chiesi; Rajiv Goel, an executive of Intel Corp.'s venture capital arm; McKinsey & Co. executive Anil Kumar; and IBM executive Robert Moffatt.
Insider trading is a notoriously tough crime to prove because it requires intimate knowledge of motives and actions. Prosecutors know the problem is chronic and widespread, but choose to go after a clutch of high-profile cases, such Martha Stewart, as a deterrent to the thousands of others who might be tempted.
Mr. Rajaratnam, a graduate of the University of Pennsylvania's Wharton School, is the best known of the group. He's ranked No. 559 by Forbes magazine this year among the world's wealthiest billionaires, with a $1.3-billion net worth. His hedge fund manages $7-billion in assets.
Robert Khuzami, director of enforcement at the Securities and Exchange Commission, took a swipe at Mr. Rajaratnam's reputation, saying he wasn't the trading genius that he portrayed to clients.
"He is not the master of the universe. He is a master of the Rolodex," Mr. Khuzami said.
The SEC, the Federal Bureau of Investigation and the Justice Department built their case with the help of an unnamed co-operating witness, who started talking to the FBI in 2007 and served as a conduit for much of the insider information. The person, who has pleaded guilty and is co-operating with authorities, had sought a job at Galleon in 2005 and helped prosecutors by "making consensual recordings of four telephone conversations" with Mr. Rajaratnam, according to the complaint.
The FBI also intercepted incriminating cellphone and text messages.
In one conversation about a pending deal that was described in a criminal complaint, Ms. Chiesi is quoted as saying: "I'm dead if this leaks. I really am … and my career is over. I'll be like Martha [expletive]Stewart."
Ms. Stewart, the homemaking maven, was convicted in 2004 of lying to the government about the sale of her shares in a friend's company that saw its stock plummet after a negative public announcement. She served five months in prison and five months of home confinement.
In another case, the FBI informant arranged to pay a Moody's analyst $10,000 for advance knowledge that Blackstone Group was poised to buy Hilton Hotels in 2007.
Also in June, 2007, the informant fed Mr. Rajaratnam a tip that Google was about to disappoint investors with its second-quarter results - information that he learned from an employee at Market Street Partners, a public relations firm hired by Google to handle earnings announcements. The employee apparently was looking for hedge funds willing to pay for insider information.
The timing of the arrests might be explained by a footnote in the complaint against Mr. Rajaratnam. In it, an FBI agent said he had learned that Mr. Rajaratnam had been warned to be careful and that Mr. Rajaratnam, in response, had said that a former employee of the Galleon Group was likely wearing a "wire."
The agent said he learned from federal authorities that Mr. Rajaratnam had obtained a plane ticket to fly from Kennedy International Airport to London yesterday and to return to New York from Geneva, Switzerland, next Thursday.
The case also involved trading in shares of Clearwire Corp., Akamai, Polycom and People Support Inc.
With files from Associated Press