October 21, 2009 6:35 PM

Sinking Galleon Group Latches On to Gibson Dunn

Posted by Brian Baxter

UPDATE: Oct. 22, 8:18 a.m. The New York Times and The Wall Street Journal report that former Galleon employee Roomy Khan is the government informant cooperating in the insider-trading investigation. Wilson Sonsini Goodrich & Rosati has represented Khan in an unrelated civil suit filed by a former housekeeper.

The Am Law Daily has learned that Gibson, Dunn & Crutcher securities enforcement cochair Barry Goldsmith (pictured right) is advising on the closure of the Galleon Group. The move to shut down the funds was hastened by the insider-trading charges brought against Galleon founder and Gibson Dunn client Raj Rajaratnam on Friday.

As we've previously reported, Gibson Dunn white collar defense cochair Jim Walden also is representing Rajaratnam. Neither Goldsmith nor Walden responded to requests for comment; a Gibson Dunn spokeswoman says that the firm is not advising Galleon Management itself.

In a letter to investors on Tuesday, Rajaratnam emphasized the liquidity of his fund but stated that the time had come to wind down the funds. It's a process that hedge fund advisors say Rajaratnam will handle with U.S. and offshore counsel.

"They're going to suspend any redemptions to enter into an orderly wind down and put all investors on equal footing," says Alston & Bird partner Timothy Selby, whose practice focuses on the formation and management of hedge funds.

Selby, who spoke to us generally about such matters and not specifically about Galleon, says that not every investor will be able to put in a request to immediately redeem their accounts. Galleon--a swashbuckling fund that once bankrolled its own rap song--had reassured investors only a few days ago that it could survive. A spate of redemptions on the heels of Rajaratnam's perp walk by federal investigators on Friday evidently convinced the founder that his fund couldn't survive.

Rather than penalize the small minority of people unable to send out redemption requests, Selby explains that funds forced to liquidate on short notice usually suspend those requests in order to ensure that those investors aren't left with less-liquid assets.

"When you unwind the fund, you're going to have a lot more assets left," Selby says. "If you have any administration expenses associated with that, those expenses would be borne by a small group. So if it looks like a fund is going down, you want to suspend redemptions and liquidate the portfolio in an orderly and efficient manner."

As a result, the larger group of investors shoulders any final liquidation costs, like audits. While most of Galleon's larger investors have sought to pull out, Selby says they'll likely receive a notice stating that any redemption requests will be processed in an orderly manner along with mandatory redemptions.

"It's the most equitable approach, as all investors are treated fairly," says Selby (pictured left), adding that fund directors will be working with offshore counsel to approve resolutions unwinding the fund. For the domestic funds, the general partner (in this case Rajaratnam), will make decisions on the advice of counsel.

For illiquid securities, Selby says a fund will need to consider whether or not to make distributions in kind to investors. A bankruptcy filing is unlikely, he says, because it would be the fund filing itself. (That would only happen if a fund's liabilities exceeded its assets, which doesn't appear to be the case with Galleon.)

"If you're a disgruntled investor you're filing suit against the manager, not the fund, because then you'd be suing yourself," Selby says. If anyone goes bankrupt in a fund's dissolution, Selby says it's usually the general partner who is hit with a series of claims by out-of-pocket investors.

A trustee could be appointed to handle a fund's liquidation, but generally a manager handles the process because he has the most knowledge of the securities and is able to get the best value for them. (Sources say federal authorities have no plans to appoint a liquidating trustee.)

It wasn't immediately clear who was advising Galleon Management on its closure. A spokeswoman for the fund told us she would check into the matter; we had not heard back from her by the time of this posting.

Alston & Bird has done some compliance work for Galleon, but Selby says the firm is not involved in the fund's dissolution. Lindi Beaudreault, a former partner at the firm who is now director of global regulatory affairs at Bank of America/Merrill Lynch, was the relationship partner on the Galleon work.

Beaudreault, who couldn't immediately be reached for comment, represented Galleon when it paid a $870,247 fine to the SEC in 2005 to settle a civil investigation that it improperly profited from shorting stock 17 stocks over a three-year period. Beaudreault was a partner at LeClair Ryan at the time. (Jerry Isenberg, a financial services partner at LeClair who also advised Galleon, didn't respond to a request for comment.)

Galleon Management has been named as a defendant in the civil case filed by the SEC against Rajaratnam. U.S. district court judge Jed Rakoff in Manhattan--of BoA/Merrill fame--will be presiding over the case.

Make a comment

Comments (3)
Save & Share: Facebook | Del.ic.ious | | Email |

Reprints & Permissions

The comments to this entry are closed.