America’s biggest insider case is starting to spread, snaring some of Wall Street’s bluest-of-blue-blood banks in its web, as more disclosures emerge about the dodgy trading of the Galleon hedge fund and its founder, Raj Rajaratnam.

The claims, that the fund’s big Wall Street banks provided information and other material to Galleon, are explosive and go straight to the heart of how Wall Street and what’s known as the “shadow banking system” operate daily.

At the same time, there’s news of a hedge-fund scandal emerging in Germany (with US links), which  involves a money-laundering sting run by the FBI. Its founder, a man called Helmut Kiener, was been arrested as the German investigation has moved to the US where the alleged money-washing operation is under investigation.

Both cases are grabbing more and more attention in Northern Hemisphere business circles. Coming on top of the huge Bernie Madoff fraud (now officially put at $US29 billion and rising by the trustees) there’s a growing sense that the hedge fund industry is in a mess, with more disasters and criminal acts to be uncovered.

The Financial Times has reported that Galleon “paid hundreds of millions of dollars a year to its Wall Street banks and in return regularly received market information that would not have been disclosed to most investors, executives familiar with the matter said.

“Galleon, whose founder, Raj Rajaratnam, was charged with insider trading this month, said it paid about $250 million to its banks last year. Executives who dealt with the fund said it paid more in fees and other charges during the boom years of this decade.”

The paper named Morgan Stanley and Goldman Sachs as two of the banks involved: it said Goldman and Morgan were “Galleon’s top providers of hedge-fund services — or prime brokerage.”

One executive who dealt with Galleon said: “They wanted anything the public did not have. They got various pieces and put them together and that was their edge.” A former Goldman executive who provided services to funds including Galleon said: “They were tough and aggressive. They cared about short-term returns and cared a lot about the impact of their trading and the costs. They expected a lot of market information.”

Earlier, US media outlets named Hector Ruiz, the former CEO of AMD, the second biggest computer chip maker in the US, as a source of confidential information for Galleon by the Wall Street Journal.

He joins Rajaratnam, Danielle Chiesi and Mark Kurland of hedge-fund firm New Castle Partners; and executives at IBM, Intel Corp (AMD’s bigger competitor) and McKinsey & Co. were arrested earlier this month on charges they were part of a network that trafficked in private, market-moving information.

US federal prosecutors used wire taps over roughly two years to track the activities and conversations of Rajaratnam, Chiesi, Kurland and others.

Other reports suggest that the person involved in telling the feds about the latest insider dealings, was convicted in 1999 of proving information to Galleon.

But now the claims that the fund’s bankers provided information, (not actual hard data, but impressions and background detail not available to ordinary investors), has widened the case again. If proven, the claims will seriously damage the reputation of the banks and individuals involved in dealing with Galleon, as well as raising suspicions about the activities of all hedge funds and fellow travellers.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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