top of page
Men in Suits


Raj Rajaratnam was the chief of Galleon Management which was globally ranked as one of the largest hedge fund management firms. He had earned quite a good reputation because of his contribution to the sectors of technology and healthcare investments. The business of the Galleon group expanded vastly during the period 1997-2008. In the year 2009, he was accused of as many as fourteen charges pertaining to conspiracy and fraud on stock exchange, all of which were proven. The district court of the USA imposed a monetary penalty of $10 million and ordered forfeiture of $53 million. Rajaratnam was sentenced to 11 years imprisonment, which is the lengthiest for any insider trading case. In addition to the criminal penalties, a civil penalty amounting to $92.8 million was also imposed. This was a huge success for the investigating authority in the USA.

The incident that drove SEC to raise doubts about Rajaratnam was a message that was stored on his mobile phone when investigation proceedings for alleged insider trading were being carried out on his brother. The sender of this suspicious message was a hedge fund consultant named Roomy Khan who supplied material non-public details about a few big names such as Hilton Hotels, Polycom and Google. A barter system of information was agreed upon between the Galleon head and the consultant under which Rajaratnam supplied details on technology-based entities to Roomy Khan for the insider information provided by him. The pieces of evidence that were collected in respect of these transactions were details of the call list in which the timings and subsequent transactions immediately following the call played a huge part. The details revealed that soon after the talks between the two were concluded on the phone, trading in the stocks of these companies was given effect to by him.

Rajaratnam very smartly built connections with prominent insiders of various entities and institutions. His strong network of connections can be reflected herein below. While committing the offence of insider trading Rajaratnam acted in the capacity of a tippee. He offered many incentives in the form of monetary benefits or arrangement of facilities providing sexual services etc. to the tippers in exchange for the valuable information provided by them which he further utilised to trade in the stocks to his benefit. The employees who had previously worked with the Galleon group shared the price-sensitive information with Rajaratnam on the basis of an informal agreement between them. In such a manner he received material information from many companies namely Integrated Circuit Systems (ICS), Vishay Intertechnology, ATI Technologies Inc etc. The employees themselves had received information from a third source and this is how a chain was formed. There existed evidence of email exchanges between Rajaratnam and the employees in which the two were having a conversation in code language about mergers.

There are many other corporate insiders who are involved and associated with Rajaratnam in the offence. He traded on the stocks of Advanced Micro Devices Inc (AMD) and eBay Inc on the basis of information provided by their partner Anil Kumar. Transactions in the shares of Akamai Technology, Inc were carried out by the giant based on insider secret revelations made by Danielle Chiesi who worked at another hedge fund. He received major help from the ex-Goldman Sach Director Rajat Gupta, which shall be studied separately in the later part of the case study.

In the defence of Rajaratnam, many arguments were put up such as the billionaire had a history of deeply studying and analysing the prospects of the company and the published articles relating to the company and these were the qualities that made him stand out in the business world. It was argued that such a detailed study undertaken by Rajaratnam proved beneficial to him in making speculations about the company’s probable developments or falls and to support this argument, abundant pieces of articles and reports highlighting the affairs of the above-mentioned companies were shown to lie in his possession. However, evidence favouring insider trading outweighed the evidence supplied in favour of his innocence.

The SEC took nearly three years to complete the investigation. Documents in massive quantities were accumulated by the SEC. It comprised evidence of all kinds and categories right from electronic messages to documentary materials to transaction patterns. The regulatory agency also obtained responses from hundreds of subpoenas served on banks, clearinghouses, telecom companies and the issuers of securities. The government primarily resorted to wiretaps in this case. The federal regulatory agency not only wiretapped the main offender Rajaratnam’s phone but also tapped the phones of many who were linked to him. The usage of wiretaps for the first time makes this case unique and sets a precedent for investigating future irregularities in the capital market. A scenario of witness cooperation is also clearly visible in the case. The witnesses in the investigation were cooperative to such an extent that they were even ready to bear the risk of recording the conversations with Rajaratnam.

Rajaratnam continued his wrongdoings for a considerable period of nearly seven years. This case demonstrates that people working in hedge fund management firms are highly capable of gathering insider information and the wrongdoer alone does not face the consequences but the innocents around the wrongdoer also have to suffer the repercussions.


The study of the Rajaratnam case is incomplete without the mention of Rajat Gupta. Rajat Gupta was an entrepreneur who carried on business activities in India and the US. He served several prestigious corporate positions in many entities such as former MD of McKinsey & Company, which is a prominent consulting firm and ex-director of Goldman Sachs a leading finance firm, Procter & Gamble and American Airlines. Rajat Gupta’s failure to respect his fiduciary duty towards the company as a director started four years prior to his conviction in 2012. In a boardroom meeting of Goldman Sachs in the year 2008, a deal was concluded between Warren Buffet and the Company wherein Buffet decided to shell out $5 billion in lieu of the Berkshire Hathaway deal, followed by the Company’s approval.

The deal was confidential in nature and it was to come out in the public domain only the next day. The above agreement which was only known to the members present in the board meeting was inside information as it had the potential to escalate the stock price of Goldman Sachs materially. However, within a couple of minutes, after the meeting ended, this material information along with the immediately preceding three months' income of the company was leaked by the very trusted Rajat Gupta to his close friend Raj Rajaratnam. On receiving this profitable piece of information, the hedge fund billionaire in no time purchased thousands of Goldman Sachs shares in pursuance of his unethical intention to make illegal gains. The expectations of a significant price rise in the stocks turned into reality the next morning when the agreed deal was made public. Consequently, Raj Rajaratnam profited massively as he managed to garner oddly $14 million into his pockets and escaped losses worth $3 million roughly.

The investigations initiated by the SEC revealed much circumstantial evidence in favour of the alleged insider trading. A telephonic conversation between the two friends immediately after the board meeting on the day of the agreement as well as on the next day prior to the announcement of the deal and the purchase of shares made by Rajaratnam in the number of thousands soon after both the telephonic exchanges was one of the primary evidences. An unpublished balance sheet of Procter and Gamble was also leaked by Gupta to Rajaratnam as a result of which Rajaratnam benefited by $0.5 million. The jury declared Gupta guilty of insider trading in 2012 and on his appeal being rejected, he had to complete his prison sentence of two years.

The case of Rajat Gupta enlightens us on many aspects. One aspect is that a business degree from a premium institute even like Harvard does not mandatorily imbibe lessons on ethics and integrity. The guilty conviction for insider trading of a businessman of such high stature was appalling to the whole business community. Rajat Gupta acted as a fiduciary oath breaker and this conduct did not go unpunished.


The Rajaratnam and Rajat Gupta conviction accounts as one of the paramount insider dealing incidents. Sentencing such corporate giants in the impugned securities misconduct did set an example of a landmark punishment as well as deterrence to the miscreants present in the capital market.

Our Directors’ Institute- World council of Directors can help you accelerate your board journey by training you on your roles and responsibilities to be carried out in an efficient manner helping you to make a significant contribution to the board and raise corporate governance standards within the organization.

Our ESG Expert certification will help you to amplify your understanding of corporate governance in a detailed manner paving a way for you to become a globally recognized ESG leader.

72 views0 comments


  • alt.text.label.LinkedIn
  • alt.text.label.Facebook
bottom of page