Brendan McDermid/ReutersGovernment documents show Rengan Rajaratnam of Sedna worked with an SAC Capital trader to trade technology stocks.Some trades by Raj Rajaratnam’s younger brother in a technology stock nearly seven years ago may have inadvertently put SAC Capital Advisors, the hedge fund behemoth founded by Steven A. Cohen, on regulators’ radar, government documents show.
In recent weeks, the investigation into SAC has intensified, with Mr. Cohen and four of the firm’s top executives receiving subpoenas to appear before a grand jury and testify in the government’s investigation into insider trading at SAC. The hedge fund is the biggest to become the focus of a government inquiry since the Galleon Group, the fund run by Raj Rajaratnam.
Event-driven hedge funds, which SAC is and the defunct Galleon was, dive in and out of stocks before and after market-moving developments. As a result, large trades by such funds can draw regulators’ attention from time to time. Whenever there is a sharp run-up in a stock’s price, it is common for electronic monitoring systems at the nation’s biggest stock exchanges to flag the jump and produce reams of data on the buyers and sellers of that stock.
But in the summer of 2006, regulators had another reason to focus on Galleon and on SAC. In the course of investigating Sedna Capital, the $80 million fund of Mr. Rajaratnam’s younger brother, Rengan, over accusations of “cherry picking,” regulators found some communications between Rengan and an SAC trader who is no longer with the firm. “Cherry picking” is when an asset manager reserves his winning trades for one fund, typically a friends and family fund.
The exchanges between Rengan and the SAC trader coincided with Sedna and SAC’s accumulating big short positions — or bearish bets — in the shares of Arris Group, a communications equipment maker, days before that company posted earnings that fell short of expectations.
Hedge Fund Inquiry
Before setting up Sedna Capital, Rengan was employed briefly at SAC. Though his elder brother and Mr. Cohen were not close friends, they traveled in similar circles. For instance, in February 2007, Mr. Cohen held a cocktail and dinner at his 1920s estate in Greenwich, Conn., to showcase some of his newest art purchases, among them a de Kooning “Woman” painting. Mr. Cohen invited Mr. Rajaratnam to the event, but the Galleon chief sent a deputy in his place.
In May 2011, Mr. Rajaratnam was convicted on insider trading charges. He is now serving an 11-year sentence in a Massachusetts prison.
Rengan Rajaratnam was indicted this spring on charges of profiting on inside information in connection with trades placed in stocks such as Advanced Micro Devices and Clearwire. In late March, the younger Rajaratnam, 42, flew to the United States from Brazil voluntarily and pleaded not guilty to insider trading charges in the same federal court in which his brother’s trial played out two years ago.
A court filing made public on Monday indicates that Rengan Rajaratnam is in talks with prosecutors over a possible plea agreement. The plea discussions were disclosed in a letter from prosecutors seeking to delay a court hearing scheduled for Tuesday. His lawyer declined to comment for this article.
SAC also declined to comment. Mr. Cohen has not been charged with wrongdoing, and he has maintained that he has behaved appropriately at all times.
The Arris trades that piqued the curiosity of regulators took place in the summer of 2006. On July 24, at 2:06 p.m., Rengan called the SAC trader and the two spoke for about a minute and a half. Three minutes later, Rengan sent an instant message to his brother saying that the SAC trader “is checking and will get back to me in 45 minutes,” according to government documents.
Then, at 2:35 p.m., the chief operating officer of Sedna sent an instant message to Rengan and said the SAC trader had called. “Asks that you call him on his cell.” Shortly after 3 p.m., minutes after Rengan hung up with the trader, he called Raj.
The next day, Sedna accumulated a short position in Arris of 707,000 shares and SAC Capital built up a bearish bet of 140,000 shares in the company’s stock, adding to a short position of 17,000 shares SAC accumulated the previous day, according to government documents.
The documents were disclosed during a hearing in October 2010 to decide if an affidavit to obtain a search warrant, or in this case a wiretap, relied on false statements as Mr. Rajaratnam had claimed.
Also on July 25, 2006, the SAC trader sent an instant message to Rengan highlighting news that Hewlett-Packard had paid $4.5 billion to acquire an Israeli technology company called Mercury Interactive, which traded under the ticker symbol MERQ.
“Now u know why we owned MERQ … this dude gets all these,” the SAC trader wrote.
“We need to talk at dinner. …,” Rengan replied.
“Well, I just lay it out so you can play it out,” the SAC trader messaged.
(Sedna also had acquired a long position, or bullish bet, in the shares of Mercury Interactive in June before the Hewlett-Packard deal was announced.)
The similarity of trades between Sedna and SAC in Arris and Mercury Interactive, and the exchanges between Rengan and the SAC trader, struck S.E.C. investigators as potentially significant.
“It is one thing to get a surveillance report that says this fund placed a well-timed trade,” said one person familiar with the early inquiry. “What the I.M.’s and other communications did was give us an ‘in.’ ”
By March 2007, when lawyers from the S.E.C. met with criminal authorities to enlist their help in the expanding investigation, they were still exploring the possibility of building a case against SAC around the Arris trades.
In a Federal Bureau of Investigation memo dated March 30, 2007, that requested an “initial inquiry” in trading in Arris and Advanced Micro Devices, SAC is named along with Rengan and his firm, Sedna, and Raj and his fund, Galleon.
Also cited on the title line of the F.B.I. memo was Canvas Capital, an SAC Capital subsidiary. Investigators at the time were exploring whether the SAC trader had shared information about Arris with Canvas Capital.
Ultimately, the government was unsuccessful in building a case around the trading in Arris. It could not link SAC Capital and its trader to receiving nonpublic information about Arris from Rengan Rajaratnam or sharing it with Canvas Capital. The five-year deadline for bringing a case has expired.
The trades in Arris served as a prelude to the government’s exhaustive investigation into SAC. Now the government has a multipronged investigation of the hedge fund under way.
One part of the inquiry focuses on SAC’s avoiding losses by dumping its $700 million stake in the pharmaceutical companies Elan and Wyeth after a former SAC employee, Mathew Martoma, received secret information from a doctor about problems with a new Alzheimer’s drug. Another part focuses on inside information about Dell that SAC has been accused of receiving through a network of sources.