THE GALLEON CRIMINAL CASE IS EXPANDED

The Government continued to build its insider trading case against Raj Rajaratnam and Danielle Chiesi, filing a superseding indictment on Tuesday. U.S. v. Rajaratnam, Case No. 09 mg 2306 (S.D.N.Y.). While the basic contours of the case remain the same, discussed here, the new indictment adds detail and additional claimed illegal trading profits building on new guilty pleas. Since the original indictment, the Government has obtained guilty pleas from:

• Anil Kumar (a former senior partner and director at international consulting giant McKinsey & Co.), who pleaded guilty to engaging in an insider trading scheme with Mr. Rajaratnam;

• Rajiv Goel (a former director in strategic investments at Intel Capital, the investment arm of Intel Corporation), who pleaded guilty to engaging in an insider trading scheme with Mr. Rajaratnam; and

• Mark Kurland, who pleaded guilty to engaging in an insider trading scheme with Ms. Chiesi. Mr. Kurland is a former senior executive at New Castle LLC, the fund where Ms Chiesi was employed and which is named as a defendant in the parallel SEC enforcement action discussed here.

The new allegations regarding Mr. Kumar’s involvement with Mr. Rajaratnam are substantially similar to those in the SEC’s recently amended complaint. According to the indictment, Mr. Kumar furnished defendant Rajaratnam with inside information about AMD’s planned acquisition of ATI from March through July of 2006. He also provided inside information regarding eBay. In return, Mr. Rajaratnam paid Mr. Kumar. The funds were wired off shore and then returned and invested in Galleon. Overall, Galleon is alleged to have made at least $24.5 million in profits from the information furnished by Mr. Kumar.

The superseding indictment also details about the claimed insider trading scheme of Messrs. Rajaratnam and Goel. The allegations here focus on transactions in the securities of Intel, transactions which have in large part been reflected in earlier charges. Mr. Goel is alleged to have tipped Mr. Rajaratnam in at least two instances about Intel. One was in April 2007, relating to Intel’s quarterly earnings announcement. A second was in 2008 regarding Intel’s plans to invest in a joint venture with Clearwire.

Overall, Messrs. Goel and Rajaratnam had, according to the Government, a relationship which ran from 2005 through 2009. During that period, Mr. Rajaratnam gave Mr. Goel money to assist with personal matters and earned profits in his personal trading account. Galleon is claimed to have made at least $3 million in illegal profits from the relationship.

In addition to the substantive charges, the superseding indictment contains a forfeiture count which seeks $49 million. The amount is based on $45 million in claimed illegal profits made by Galleon and another $4 million by New Castle.

A PRELIMINARY INJUNCTION IN ANOTHER PONZI SCHEME CASE

Ponzi schemes were once thought to be difficult to detect. In the wake of the market crisis and huge frauds such as Madoff, however, these cases seem to have become a staple of SEC enforcement. Last year, the Commission brought over one hundred of these cases. Frequently, there were parallel criminal cases or, charges were brought shortly after the SEC initiated its action. In some instances, a parallel case was brought by the CFTC. Many of these cases moved forward quickly, with consents to freeze orders and the appointment of receivers charged with marshalling the assets.

Last week, the Commission obtained a preliminary injunction in a Ponzi scheme case that began with a complaint filed on January 7, 2010, as discussed here. SEC v. Elkinson, Case No. 10-CA-10015 (D. Mass.). The complaint alleged that, while working from home, Richard Elkinson was able to raise about $28 million over a period of several years from 130 investors in twelve states. Mr. Elkinson apparently lured investors to purchase promissory notes in a business that was supposed to be brokering contracts on behalf of a Japanese firm. That firm, investors were told, manufactured uniforms for police, prison guards and others. The products were sold to large purchasers such as local governments.

Investors were given promissory notes signed by Mr. Elkinson which typically required payment within about one year. The interest rate ranged from 9% to 13%.

The SEC, however, claimed that Mr. Elkinson had no relationship with a Japanese uniform manufacturer and that there were no contracts. While some investors did in fact receive the promised payments, the Commission claimed that they were made with funds obtained from other investors. The scheme continued as long as a sufficient number of investors rolled over their investment since much of the money was in fact diverted to the personal use of the defendant.

The Commission’s complaint charged violations of the Securities Act registration provisions in Section 5 and of the antifraud provisions of that Act as well as the Exchange Act. In granting the SEC’s request for a preliminary injunction prohibiting violations of those sections, the court also order a freeze of Mr. Elkinson’s assets and all proceeds from others, prohibited the acceptance of additional investor funds and directed that relevant documents not be altered or destroyed. See also Litig. Rel. 21410 (Feb. 5, 2010). Parallel criminal charges have also been filed.