Galleon Probe Stymied by Lack of Follow-up, ex-FBI Agent Says
(Bloomberg) — An insider-trading probe of Galleon Group LLC a decade ago was slow to get off the ground because of turnover among investigators and the departure of a key witness from Intel Corp., a former FBI agent said. Russ Atkinson led the probe of former Intel employee Roomy Khan's leaks to Galleon Group in 1998. Khan's departure from the Santa Clara, California-based chipmaker hindered the FBI's pursuit of any potential wrongdoing by Galleon, Atkinson said in a telephone interview last week.
"It's unfortunate that no one really followed through strongly," said Atkinson, 62, who spent 24 years with the Federal Bureau of Investigation before retiring in 1999. "It would have taken a major effort."
Khan is the government's star witness in a case brought in October against Galleon founder Raj Rajaratnam, in which Khan has pleaded guilty. In a separate case, she was sentenced to three years probation in 2002 after pleading guilty to wire fraud for disseminating confidential company sales information while she worked as a product marketing engineer at Intel (INTC), according to prosecutors' court filings unsealed in California last week.
Atkinson, who was based in San Jose, California, from 1991 to 1999, said the soaring cost of living in Silicon Valley contributed to turnover at the office as agents sought transfers elsewhere. After the attacks of Sept. 11, U.S. enforcement agencies in New York and elsewhere also were absorbed with terrorism investigations.
Prosecutors have said the current case dates back to at least November 2007, when Khan began cooperating with authorities, court documents show.
Hidden Camera Atkinson said Khan's dissemination of confidential company information made him suspect that it was being used for insider trading. "If there was insider trading going on, we needed to focus on Galleon and Raj," Atkinson said.
Prosecutors said in the filing unsealed last week that they couldn't tie Rajaratnam to illegal insider trading connected to the Intel information. He also didn't pay for that information, investigators said. To monitor Khan, Intel set up a hidden video camera and obtained phone records that showed she faxed information to Galleon in New York, Atkinson said. The camera was ripped out by an employee, not Khan, after it was discovered, he said. "We would have liked to have gathered information for a longer time, but we weren't able to do that," he said. "That was a minor setback."
'Major Blow' Joseph Schadler, a special agent in the FBI's San Francisco office, said large-scale financial fraud probes are time consuming and complex.
"The high bar of proof beyond a reasonable doubt for a successful prosecution demands the evidence be airtight," he said in an e-mailed statement. "It is not at all unusual for these cases to take several years from inception to conviction." The probe hit another snag when Khan quit Intel after receiving a poor performance review from her manager, who didn't know that Khan was under investigation by the FBI and the company's security department, Atkinson said. "It was a major blow," he said. "It took away so many techniques, the phone monitoring, the cameras."
Still, Atkinson said the FBI didn't do anything wrong after Intel passed on the information about Khan. The FBI also obtained records from the Securities and Exchange Commission that showed Khan hadn't traded in Intel stock, so there was no evidence that she had profited from inside information, Atkinson said.
'Small Fry' "It was not a made case when they gave it to us," he said. "It was a small fry nonprosecutable case" after Khan left the company.
Rajaratnam, 52, was arrested Oct. 16 and accused by federal prosecutors of earning millions of dollars from stock trades made with inside information from corporate executives. The SEC filed parallel civil lawsuits against him and more than 20 other hedge fund executives and corporate insiders, in many cases basing claims on telephone calls covertly recorded by criminal authorities.
Stanislao German, Khan's lawyer, didn't return a message seeking comment. Rajaratnam's lawyer, John Dowd, declined to comment.
Galleon's Research Rajaratnam has denied any wrongdoing. Defending himself last month against SEC allegations, he said in a court filing that his trades were based on research by Galleon analysts and on published media reports. Rajaratnam challenged the SEC's use of evidence from wiretaps and assailed Khan as unreliable.
Chuck Mulloy, a spokesman for Intel, declined to comment on the details of Khan's case. "We always cooperate with law enforcement and that's what we did in this case," he said. Another setback in the decade-ago inquiry was the botched effort to get Rajaratnam's phone records, Atkinson said. The FBI obtained the wrong long-distance carrier for Rajaratnam, so efforts to subpoena the call information were delayed, he said. Atkinson said he left the agency before any phone records were obtained. In early 1999, Atkinson said he decided to confront Khan with the evidence he had. She was unemployed at that point, he said. In an interview with Atkinson and another agent, Khan denied knowing Rajaratnam or faxing him information from Intel, Atkinson said. He said he showed her the pictures from Intel. Without admitting anything, she asked whether she'd have to go to jail if she cooperated, Atkinson said.
Case Reassigned Khan "corrected her statements" after briefly denying her conduct and agreed to plead guilty and cooperate, according to a June 2002 U.S. sentencing memo filed in federal court in San Jose. After Atkinson left to take a job as head of security for a technology firm, the case was reassigned to a less experienced agent who transferred to another city not long after getting the case, he said. The case should have been taken over by the SEC at that point, he said. A third FBI agent took over the investigation that led to Khan's prosecution and cooperation, Atkinson said.
In an e-mail, SEC spokesman John Nester said the agency sued Rajaratnam in October and Khan in November.
"Prior decisions about how to proceed were made in consultation with our law enforcement partners," Nester said. The case is SEC v. Galleon Management LP, 09-cv-8811, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporter on this story: Ian King in San Francisco at firstname.lastname@example.org; Karen Gullo in San Francisco at email@example.com.