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Cozy Valley culture under scrutiny in Galleon case

 

Anil Kumar, (L) a director of McKinsey & Co global management consulting firm is escorted by an FBI agent.

Anil Kumar, (L) a director of McKinsey & Co global management consulting firm is escorted by an FBI agent.

Silicon Valley may be a long way from Wall Street, but they have at least two things in common: Personal connections matter in the pursuit of wealth and neither is a stranger to financial crime.
Just last week, the Street and the Valley were pulled into the same scandal after regulators charged six people, including Raj Rajaratnam, the billionaire founder of hedge fund Galleon Group, for crimes related to insider trading.
Four of those charged lived in the greater New York area but two, Intel Capital executive Rajiv Goel, and top McKinsey consultant Anil Kumar, were Valley-based. Victims of the insider trading included some of the biggest technology firms in the Valley, including Google Inc (GOOG.O) and microchip producer Advanced Micro Devices (AMD.N).
Several other companies named in the prosecutors’ complaints as key participants in the case, including video conferencing company Polycom Inc (PLCM.O), are also based on the West Coast.
And a tiny San Francisco-based investor relations firm, Market Street Partners, was central to the most profitable trade cited by prosecutors in the scheme.
Indeed, the role of a Market Street employee in the case is in some ways the most brazen. Neither the firm nor any of its current employees are implicated in the current probe, a lawyer for the firm said in an emailed statement on Wednesday.
Prosecutors say that the employee tipped off an informant for Rajaratnam about Google’s disappointing second-quarter earnings before their release in July 2007, leading the hedge fund to net $9 million in profits from illegal trades.
TOO CLOSE FOR COMFORT
Informal networks are the bedrock of the Valley’s business culture. Word-of-mouth travels quickly down the stretch of land in northern California that is home to household tech names like Google and Intel Corp (INTC.O). Relationships are built on trust, business deals are struck in coffee shops.
But the network of entrepreneurs, public company executives, venture capitalists, bankers, public relations firms and others can sometimes get too cozy.
“It’s an ecosystem, with all of the different constituents being in the same location,” said Mrinal Desai, co-founder of CrossLoop, a startup that connects customers to professional computer support. “All the constituents betting on something are there together and they need to be together to make it work. The moment you start doing favors, it becomes a problem.”
Galleon’s Rajaratnam built his expertise around technology companies, many of them based in the Valley. He is charged, along with others, of making illegal trades in the stocks of AMD, Sun Microsystems Inc (JAVA.O) and others.
Only six years ago, the Valley became infamous in financial circles for “Friends of Frank” accounts, after regulators began probing if Wall Street was involved in a tainted IPO game during the height of the tech boom.
These accounts belonged to many tech industry movers and shakers who got handsome returns in exchange for giving their business to investment banker Frank Quattrone’s team at Credit Suisse First Boston bank.
A scandal about stock options pricing that ensnared many tech companies in 2006 also showed how herd behavior dominates business in the Valley. Many of the companies who faced government investigations followed very similar compensation practices. 
Silicon Valley may be a long way from Wall Street, but they have at least two things in common: Personal connections matter in the pursuit of wealth and neither is a stranger to financial crime.
Just last week, the Street and the Valley were pulled into the same scandal after regulators charged six people, including Raj Rajaratnam, the billionaire founder of hedge fund Galleon Group, for crimes related to insider trading.
Four of those charged lived in the greater New York area but two, Intel Capital executive Rajiv Goel, and top McKinsey consultant Anil Kumar, were Valley-based. Victims of the insider trading included some of the biggest technology firms in the Valley, including Google Inc (GOOG.O) and microchip producer Advanced Micro Devices (AMD.N).
Several other companies named in the prosecutors’ complaints as key participants in the case, including video conferencing company Polycom Inc (PLCM.O), are also based on the West Coast.
And a tiny San Francisco-based investor relations firm, Market Street Partners, was central to the most profitable trade cited by prosecutors in the scheme.
Indeed, the role of a Market Street employee in the case is in some ways the most brazen. Neither the firm nor any of its current employees are implicated in the current probe, a lawyer for the firm said in an emailed statement on Wednesday.
Prosecutors say that the employee tipped off an informant for Rajaratnam about Google’s disappointing second-quarter earnings before their release in July 2007, leading the hedge fund to net $9 million in profits from illegal trades.
TOO CLOSE FOR COMFORT
Informal networks are the bedrock of the Valley’s business culture. Word-of-mouth travels quickly down the stretch of land in northern California that is home to household tech names like Google and Intel Corp (INTC.O). Relationships are built on trust, business deals are struck in coffee shops.
But the network of entrepreneurs, public company executives, venture capitalists, bankers, public relations firms and others can sometimes get too cozy.
“It’s an ecosystem, with all of the different constituents being in the same location,” said Mrinal Desai, co-founder of CrossLoop, a startup that connects customers to professional computer support. “All the constituents betting on something are there together and they need to be together to make it work. The moment you start doing favors, it becomes a problem.”
Galleon’s Rajaratnam built his expertise around technology companies, many of them based in the Valley. He is charged, along with others, of making illegal trades in the stocks of AMD, Sun Microsystems Inc (JAVA.O) and others.
Only six years ago, the Valley became infamous in financial circles for “Friends of Frank” accounts, after regulators began probing if Wall Street was involved in a tainted IPO game during the height of the tech boom.
These accounts belonged to many tech industry movers and shakers who got handsome returns in exchange for giving their business to investment banker Frank Quattrone’s team at Credit Suisse First Boston bank.
A scandal about stock options pricing that ensnared many tech companies in 2006 also showed how herd behavior dominates business in the Valley. Many of the companies who faced government investigations followed very similar compensation practices. 
REASSESSING RELATIONS
Google’s use of Market Street — a firm very few people outside the investor relations community have heard of — may seem unusual given the size and power of the Internet search and media company, but not too unusual for the fact that it centered on a specific relationship.
Google’s current investor relations manager, Maria Shim, is a former Market Street employee. The firm got Google’s business after Shim moved to the Internet company in 2006, people with knowledge of the situation told Reuters. Shim did not return a call seeking comment. Google declined to comment.
Google has suspended Market Street’s services and is conducting its own investigation, a spokesman said on Wednesday.
Investor relations firms act as go-betweens for companies and Wall Street by helping with earnings reports, arranging roadshows and inviting investors to put in their money.
Most large companies have their own investor relations departments, but their smaller counterparts will often hire an outside firm to help. Silicon Valley, with its scores of startups and private companies keen to go public, is an attractive market for IR services.
Investor relations are horrified by what is alleged to have happened.
“The rules are very clear on this,” said Lou Thompson, former president of the National Investor Relations Institute, now a managing director at Kalorama Partners.
“If you’re a consultant to a firm you pledge not to provide any inside information until it’s made public, and if somebody who’s running a hedge fund and kind of cozies up to you, that’s too bad, and you just have to say no.”
It isn’t the first time, though, that the Silicon Valley investor relations business has been in an unwelcome spotlight.
In 1999, authorities accused Lisa Herbst, the owner of a Silicon Valley IR business, of trading in stocks of tech companies she was hired to compose press releases for before they were released to the public, including Adobe Systems Inc (ADBE.O).
A year earlier, regulators had made similar allegations against Heidi Flannery, an Oregon-based investor relations consultant, claiming she sold stock in several tech companies while preparing press releases announcing lower-than-expected earnings for the companies.
“Something like this keeps you awake at night,” said one person with more than three decades of experience in Bay Area investor relations who asked not to be named because the industry is small. “You can’t follow your employees home at night and keep track of what they do.”
Credit: reuters.com
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