SEC Charges Silicon Valley Executive for Role in Galleon Insider Trading Scheme
The Securities and Exchange Commission today charged a former senior executive at a Silicon Valley technology company for illegally tipping convicted hedge fund manager Raj Rajaratnam with nonpublic information that allowed the Galleon hedge funds to make nearly $1 million in illicit profits.
The SEC alleges that Kris Chellam tipped Rajaratnam in December 2006 with confidential details from internal company reports indicating that Xilinx Inc. would fall short of revenue projections it had previously made publicly. The tip enabled Rajaratnam to engage in short selling of Xilinx stock to illicitly benefit the Galleon funds. Chellam tipped Rajaratnam, who was a close friend, at a time when Chellam had his own substantial investment in Galleon funds and was in discussions with Rajaratnam about prospective employment at Galleon. Chellam was hired at Galleon in May 2007.
Chellam, who lives in Saratoga, Calif., has agreed to pay more than $1.75 million to settle the SEC’s charges. The settlement is subject to court approval.
“Chellam was entrusted with sensitive company information that he divulged to Rajaratnam knowing full well that Rajaratnam would trade on it,” said Sanjay Wadhwa, Associate Director of the SEC’s New York Regional Office and Deputy Chief of the Enforcement Division’s Market Abuse Unit. “Corporate executives who exploit company confidences for personal gain will ultimately be held accountable for their illegal acts.”
According to the SEC’s complaint, filed in federal court in Manhattan, Xilinx announced in October 2006 the financial results for the second quarter of its 2007 fiscal year. Xilinx also provided guidance for the third quarter by projecting revenues of approximately $476 million to $490 million. Xilinx said it would update this revenue guidance on Dec. 7, 2006.
The SEC alleges that in the weeks leading up to Xilinx’s December 7 update, Chellam received multiple reports indicating that the company’s third quarter business results were not going to be as positive as projected in October. Chellam learned on November 21 that the top end of the projected revenue range was being lowered from $490 million to $470 million. He attended a December 4 confidential executive staff meeting where the bottom end of the revenue projection was lowered from $476 million to $455 million. On December 5, Chellam telephoned Rajaratnam and tipped him about Xilinx’s worse-than-expected performance. Just minutes after the call, Galleon hedge funds controlled by Rajaratnam sold short Xilinx stock, eventually selling short more than 650,000 shares over the course of that day and the following day.
According to the SEC’s complaint, the Galleon hedge funds reaped approximately $978,684 in illegal profits after the December 7 announcement by covering the substantial short position that Rajaratnam had accumulated based on Chellam’s tip. Chellam had more than $1 million invested in one of the Galleon hedge funds in which Rajaratnam placed these trades. In May 2007, Chellam became the co-managing partner of the Galleon Special Opportunities Fund, a venture capital fund that focused on investments in late-stage technology companies. Chellam continued to work at Galleon until April 2009 and continued to obtain confidential information about Xilinx’s financial performance and pass it along to Galleon colleagues. Chellam earned approximately $675,000 in total compensation during his employment at Galleon.
The SEC’s complaint charges Chellam with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 17(a) of the Securities Act of 1933. The proposed final judgment orders Chellam to pay $675,000 in disgorgement, $106,383.05 in prejudgment interest, and a $978,684 penalty. Chellam also would be barred for a period of five years from serving as an officer or director of a public company, and permanently enjoined from future violations of these provisions of the federal securities laws. Chellam neither admits nor denies the charges.
The SEC’s investigation, which is continuing, has been conducted by John Henderson and Joseph Sansone — members of the SEC’s Market Abuse Unit in New York — and Matthew Watkins, Daniel Walfish, Diego Brucculeri, and James D’Avino of the New York Regional Office.
The SEC has now charged 32 defendants in its Galleon-related enforcement actions, which have exposed widespread and repeated insider trading at numerous hedge funds and by other traders, investment professionals, and corporate insiders throughout the country. The alleged insider trading has occurred in the securities of more than 15 companies for illicit profits totaling approximately $93 million. Since October 2009, the SEC has filed a substantial number of insider trading actions, charging more than 400 individuals and entities. The defendants in these actions are alleged to have made more than $600 million in illicit gains comprised of profits and the avoidance of losses.