Cambridge high tech firm swept up in insider trading case

In complaints filed Friday in New York, federal prosecutors charged that the founder of hedge fund Galleon Group, billionaire Raj Rajaratnam, and five others had generated $20 million in illegal profits from illegal insider trading. The prosecutors said that Rajaratnam had cultivated a network of informants who provided him with inside information on a host of major high-tech companies, including chipmaker Advanced Micro Devices Inc., wireless network carrier Clearwire Corp. and search service Google Inc. They also charged that an unidentified Akamai employee provided inside information on the company’s financial condition, allowing Galleon to generate an illicit windfall of $3.5 million from trading in company stock.

Akamai spokesman Jeff Young said his company would not comment on an ongoing investigation.

Akamai is the world’s leading provider of Internet content delivery services - the infrastructure on which digital data flows online. The company’s obscure but vital activity enables many of the world’s leading Internet sites to inexpensively deliver vast amounts of text, audio, and video to hundreds of millions of users worldwide. Akamai estimates that it is responsible for delivering between 10 and 20 percent of the world’s Internet traffic.

“The insider trading issue has always been a priority both for the SEC [US Securities and Exchange Commission] and the Department of Justice,’’ said former Massachusetts US Attorney Michael Sullivan, now a partner at the law firm founded by former US attorney general John Ashcroft. But Sullivan said that relatively few such cases are brought to the criminal courts because they are usually difficult to prove. “Typically, it’s after the fact that you find out about it, not during the course of the transactions,’’ he said. The Galleon case, however, features wiretap evidence obtained during the period when the trades occurred.

Colby Synesael, a senior analyst at Kaufman Brothers in New York who tracks Akamai, said the company goes to great lengths to avoid leaks of confidential information. Publicly-traded companies generally observe a “quiet period’’ for a week or two prior to announcing financial results to prevent premature leaks that could affect their share prices. But Synesael said Akamai executives generally go silent for a month before reporting. “Senior management simply will not speak with investors during that time period,’’ he said. “I’ve always viewed Akamai as one of the most serious companies in terms of what their policies are.’’

Synesael said the impact of the scandal on Akamai will depend on who leaked the insider data. “I would say that it’s obviously likely that that employee would be dismissed,’’ he said. The firing of a low-ranking employee will have little impact, he added, while the removal of a top executive could have dire consequences.

Rajaratnam had come under investigation in November of 2007 after a securities trader suspected of insider trading agreed to work with federal prosecutors. His phone lines were already tapped when he was contacted on July 24, 2008 by a co-conspirator not named by prosecutors. This co-conspirator, who in June had provided Rajaratnam with information about Advanced Micro Devices, offered inside information from an unidentified employee of Akamai. The information indicated that Akamai would soon predict lower earnings for the third quarter of 2008. That announcement was made on July 30, and it led to a 20 percent drop in Akamai’s stock price.

Prosecutors say that because he knew about it in advance, Rajaratnam was able to “short-sell’’ Akamai stock. In short-selling, a trader borrows shares of a stock, then sells them at the current price. If the stock then falls in price, the trader can buy back the shares at the new, lower price and give them back to the lender. But the trader keeps the profit he made by selling the stock at its earlier, higher price. Short-selling is a common practice and perfectly legal, but not if it’s based on inside information.

Along with short-selling, Rajaratnam also allegedly bought “put options’’ in Akamai stock. A put option gives the trader the right to sell stock at a fixed price, so that after Akamai’s stock price fell, Rajaratnam could still sell his shares at the old, higher price. Again, this is legal when done without inside information.

Sullivan said businesses need strict ethical guidelines to discourage the abuse of inside information. “Obviously if you have somebody who decides they’re going to ignore the company’s ethical requirements and start sharing information,’’ said Sullivan, “there’s not much you can do to control that.’’

Hiawatha Bray can be reached at bray@globe.com.