Hedge-funder Rajaratnam linked to Tamil Tigers

Billionaire Raj Rajaratnam, the Sri Lankan-born Wall Street hedge-funder arrested last week in Manhattan in what the FBI say is the largest ever insider-trading case at a hedge fund, has landed in more hot water: the 52-year-old has been linked to a US charity authorities say channelled funds to the Liberation Tigers of Tamil Eelam – the LTTE or Tamil Tigers.

There doesn't appear to be a connection between the two investigations. Rajaratnam, founder of the $3.7bn Galleon Group hedge fund, is known as a prominent supporter of Sri Lankan causes, including efforts to clear landmines and rebuild after the 2004 tsunami. Some funds apparently moved through the Tamil Rehabilitation Organisation, which the US State Department considers a front for the Tamil Tigers.

Brigadier Udaya Nanayakkara, spokesman for the Sri Lankan defence ministry, told the FT his government has been monitoring Rajaratnam for several years.

"Raj Rajaratnam was involved in several schemes funding the LTTE," he said. "He wasn't under formal investigation because he was operating from the US... but he was still funding the LTTE frontline organisation."

Rajaratam's name was first linked to the separatist group four years ago. He denies any involvement. "I know there is speculation, but I don’t worry about it one bit," he was quoted as saying in the Sri Lankan Sunday Times. "People don't understand philanthropy in this country... Here when you do charity people say that I have got political ambitions."

The connection adds further colour and curiousity to the case of Raj Rajaratnam, who is currently released on $100m bail - the largest ever set in the US.

Now a US citizen, living in New York, he is one of the most successful of the diaspora of Tamils who left Sri Lanka to make their way in the States. His net worth is $1.3bn, according to Forbes, putting him at number 559 in a ranking of the world's wealthiest people. He contributed $30,800 to Barack Obama and $4,600 to Hillary Clinton in the last presidential election.

According to prosecutors, Rajaratnam ran a network of informants across corporate America. His ring included a senior official at IBM, executives at Intel and McKinsey & Co, two former Bear Stearns employees who had moved to a hedge fund, New Castle Partners, and an analyst at Moody's, the ratings agency.

The ring allegedly specialised in insider trading around technology investments. After one tip-off about Google stock, the scheme netted $8m; another deal made $4m after a tip-off about the sale of Hilton hotels. In all, they are alleged to have made $20m in illegal profits.

The FBI took the case seriously enough to request wiretaps, a provision rarely granted by judges in white-collar investigations and a signal of newfound US determination to crack down on white-collar crime in the aftermath of Enron, Worldcom, Bernie Madoff and others in the line-up of contemporary financial crime.

The message of Rajaratnam's arrest is unlikely to be be missed by other fund managers - that US authorities are looking to bring high-profile targets to justice using tactics used to bust arbitrageur Ivan Boesky or junk bond king Michael Milkin in the 1980s.

"This case should be a wake-up call for Wall Street," said Preet Bharara, US Attorney for the Southern District of New York, announcing Rajaratnam’s arrest. "It should be a wake-up call for every hedge fund manager and every Wall Street trader and every corporate executive who is even thinking about engaging in insider trading."

Currently, fraud cases are to ambitious prosecutors what mobsters were to the 1980s or terrorists were to the 1990s and 2000s - a professionally advantageous, even glamorous, line of prosecutorial endeavour.

It is said that Rajaratnam was not a trading genius; he just used his contacts comprehensively. "He is not a master of the universe," Robert Khuzami, the Securities Exchange Commission's director of enforcement. "He is a master of the Rolodex."

In Sri Lanka, where Rajaratnam is widely regarded as a benefactor and hero, news of his arrest has made big news.

Murli Reddy, the Colombo correspondent of the India daily The Hindu, told the FT: "Everybody in Sri Lanka is talking about his arrest. The guy invested a lot of money in the country, so that explains the great interest among people." The Sri Lankan Sunday Times put it simply: "Raj arrest triggers panic in Lanka."