Galleon Group's $63.8M insider trading ring built on illegal tips

Galleon Group was a $7 billion hedge fund founded by Sri Lankan-born Raj Rajaratnam in 1997. By the mid-2000s it was one of the world's largest hedge funds, investing in technology, healthcare and consumer stocks. What made Galleon's returns look so consistent was not superior analysis — it was a network of corporate insiders feeding Rajaratnam material, non-public information before quarterly earnings and M&A announcements.

The scheme was uncovered by an FBI wiretap investigation that recorded Rajaratnam's phone calls with a web of sources including Rajat Gupta, a former managing director of McKinsey & Company and one of the most respected figures in global business. Gupta passed confidential boardroom discussions from Goldman Sachs and Procter & Gamble directly to Rajaratnam. The illegal tips generated approximately $63.8 million in trading profits. FBI agents arrested Rajaratnam at his home in October 2009, and Galleon Group closed its doors the same day.

At trial in 2011, jurors heard wiretap recordings of Rajaratnam discussing illegal tips. He was convicted on 14 counts of conspiracy and securities fraud. Judge Richard Holwell sentenced him to 11 years in prison — then the longest sentence ever handed down for insider trading — and ordered forfeiture of $53.8 million plus a $10 million fine. Rajat Gupta was separately convicted and served two years. In total, more than 50 people were convicted or pleaded guilty in the Galleon probe, making it the largest hedge fund insider trading case in history.

The case reshaped how the government investigates Wall Street. It was the first major insider trading prosecution built primarily on wiretaps, a technique more commonly used against organised crime. The SEC tightened enforcement around expert networking firms that had served as conduits for inside information. The verdict also sent a signal that the government would pursue individuals at the highest levels of corporate America.