SEC Files Another Galleon Related Insider Trading Case

The SEC brought another insider trading action tied to convicted insider trader Raji Rajaratnam. Portions of the complaint stem from the wire taps used to build that case. SEC v. Taylor, Civil Action No. 13 CV 6670 (S.D.N.Y. Filed September 20, 2013).

Kieran Taylor was the Senior Director of Marketing at Akamai Technologies, Inc. Mr. Taylor learned through his employment that Akamai was planning to lower guidance for the year at the time it announced the second quarter 2008 financial results on July 30, 2008.

After learning that the company would lower guidance for the year, Mr. Taylor sold 2,500 shares of Akamai stock he held in his personal brokerage account. At about the same time he telephoned Danielle Chiesi, a portfolio manager at hedge fund advisory firm New Castle funds LLC. Ms. Chiesi and Mr. Taylor had been life long friends. When the two concluded their conversation, Ms. Chiesi telephone another long time friend, Raji Rajaratnam. In a telephone call captured on tape pursuant to a wire tap, Ms. Chiesi told her friend that according to her Akamai source, yearly guidance would be lowered at the time of the quarterly earnings announcement. While the stock was trading at about $32 per share, company employees thought the price would drop to about $25 Mr. Rajaratnam learned.

The next day New Castle Funds began shorting Akamai shares and purchased put options. Between July 25 and 30, 2008 New Castle Funds sold short over 300,000 shares of Akamai stock and acquired 1,500 put options. Mr. Rajaratnam increased the short position of the Galleon Management hedge funds from 300,000 to 875,000.

Ms. Chiesi also tipped Steven Fortuna of hedge fund advisory firm S2 Capital. Subsequently, that fund established a sizable short position in Akamai stock. It also purchased put options.

On July 30, 2008, after the close of the markets, Akamai announced its second quarter financial results. It also lowered its guidance for 2008. On the next trading day the price of Akamai shares, which had closed at $31.25 before the announcement, opened down at $25.06 and fell to $23.34 by the close. Mr. Taylor avoided losses of about $20,000. New Castle had gains of about $2.4 million. Galleon and S2 had profits, respectively, of $5.1 million and $2.4 million.

The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b).

Mr. Taylor settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. He also agreed to pay disgorgement of $20,635, prejudgment interest and a penalty of $120,635. In addition, he agreed to the entry of an officer director bar for five years.

To date the SEC has charged 34 firms and individuals in its Galleon related investigation. Those cases involved trading in 15 different securities and illicit profits of $96 million.

Program: Celesq and West Legal Ed present: Financial Fraud: Avoiding the Path of the New SEC Investigative Priority, online on September 25, 2013 at 12:00 p.m. EST (here).

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