DANIEL ACKER/BLOOMBERG

590 Madison Avenue in New York, also known as the IBM building, houses the offices of the Galleon group.

A SRI LANKAN business tycoon in the United States, Raja Rajaratnam, has become a textbook case of Murphy’s Law “Whatever can go wrong will go wrong”, and his country of origin is experiencing the collateral damage.

The 52-year-old mogul, with assets worth $3.7 billion, was arrested on October 16 by agents of the Federal Bureau of Investigation (FBI) on charges of vast insider trading. He was among six persons arrested on charges of securities fraud and conspiracy to commit securities fraud. Western media reports quoted unnamed federal agents as saying that they uncovered documents showing Rajaratnam as being among several wealthy Sri Lankans in the U.S. whose donations to a Maryland-based charity made their way to the Liberation Tigers of Tamil Eelam (LTTE), the militant organisation that was fighting a war for a separate homeland in the island nation.

The news of his arrest spread like wildfire in government and elite circles in Colombo. Rated as one of the richest businessmen in the world, Rajaratnam is reckoned to be Sri Lanka’s most affluent son of the soil. The founder and head of the New York-based Galleon Management hedge fund, Rajaratnam has a stake in the top 10 listed Sri Lankan companies.

On October 19, the Colombo Stock Exchange (CSE) had its largest intraday drop in five years. It fell by as much as 3.8 per cent in panic selling. The news hit the island nation at a time when the war-battered economy had begun to experience a new high. Before the Rajaratnam episode, the nearly $10 billion-strong stock exchange of Sri Lanka was rated second among the world’s best-performing markets.

Hopes of better economic growth, more market liquidity, a $2.6-billion loan from the International Monetary Fund, an upgraded rating outlook and higher foreign inflows had boosted investor confidence after Sri Lanka security forces decimated the LTTE and its leader, Velupillai Prabakaran, in May 2008.

The reasons for this behaviour of the stock market are not difficult to understand. According to the Securities and Exchange Commission (SEC) of Sri Lanka, Rajaratnam’s Galleon Management has significant shareholdings in major Sri Lankan companies – 3.47 per cent in Commercial Bank, 6.13 per cent in National Development Bank, 9.09 per cent in DFCC Bank, 29.88 per cent in Ceylon Leather and 12.98 per cent in People’s Merchant Bank.

The news of the arrest was unsettling for the Mahinda Rajapaksa government too. Justice Minister Milinda Moragoda had reportedly told President Rajapaksa in September that the Galleon group chief was willing to pay $1 million for the rehabilitation of the LTTE’s child-soldiers. But this proposal was opposed by Foreign Minister Rohitha Bogollagama, who said his Ministry had given a dossier to the U.S. Treasury Department’s Directorate of Intelligence on Money Laundering, which was investigating Rajaratnam’s involvement in funding the LTTE.

A report on the Presidential Secretariat website noted that Rajaratnam, one of the wealthiest men in the U.S., was a major contributor to the election campaigns of U.S. Secretary of State Hillary Clinton. Hillary, for her part, had ruffled many a feather in the Rajapaksa establishment a few days earlier with her statement in the United Nations Security Council: “We’ve seen rape used as a tactic of war before in Bosnia, Burma and Sri Lanka and elsewhere.” Later, Sri Lanka Minister of Foreign Affairs lodged a formal protest against the statement.

BRENDAN MCDERMID /REUTERS

Raja Rajaratnam, founder and head of Galleon Management hedge fund, after being arrested by the FBI in New York on October 16.

The Central Bank of Sri Lanka (CBSL) issued a statement that read: “Investigations are yet continuing in relation to the funding allegedly provided by Raja Rajaratnam to the Tamil Rehabilitation Organisation (TRO). Accordingly, any reports that suggest that such investigations are concluded or that Mr. Rajaratnam has been cleared of possible involvement are incorrect and misleading.” It was an effort to put a stop to the stock market mayhem. However, it remained a mystery why the CBSL said it was misleading to suggest that Rajaratnam had been cleared of the charges.

The Central Bank was not deterred by the uncertainty over extension of tariff concessions by the European Union (E.U.) to the textile industry of the island nation, which meant a possible loss of U.S. $100 million and a negative effect on the livelihoods of one lakh people. As stocks continued to tumble for the second consecutive day, the CBSL made use of its periodic report, “External Sector Performance – August 2009”, to present a rosy picture of the economy. “Exports will continue to increase during the remaining months of 2009 and in 2010, notwithstanding the uncertainties on the continuation of GSP+ concessions,” it said. The E.U.’s Generalised System of Preferences (GSP)+, the special incentive arrangement for sustainable development and good governance, offers additional tariff reductions to support vulnerable developing countries in their ratification and implementation of international conventions in these areas.

On the GSP+, the report said: “According to the European Commission’s estimate, the total value of benefits in terms of lower import duties under the GSP+ scheme for the year 2008 was euro 78 million which is only 1.4 per cent of Sri Lanka’s total exports in the same year. Therefore, the loss of preferential duty margin by around 6-7 per cent arising from a potential withdrawal of the GSP plus facility is not expected to have an adverse impact on Sri Lanka’s exports.”

Rajaratnam did his best to contain the fallout. In a letter addressed to the employees and clients of the Galleon group on October 22, he said he intended to “conduct an orderly wind-down” of the firm’s hedge funds.

The letter read, “… At this important time, I want to reassure investors of the liquidity of our funds and assure Galleon employees that we are seeking the best way to keep together what I believe is the best long/short equity team in the business.

“The privilege of managing investors’ capital is a responsibility that I have always taken very seriously. I want to reiterate that I am innocent of all charges and will defend myself against these accusations with the same intensity and focus I have brought to managing our investors’ capital.”

But even before the ink on the letter had dried, Rajaratnam was hit by two ‘missiles’, one from New Jersey and the other from Colombo. In Newark, New Jersey, a number of victims of the LTTE’s terror acts filed a suit accusing Rajaratnam and his father of knowingly helping the terrorist group.

The lawsuit in Newark, filed on behalf of 30 people who were either victims or survivors of attacks by the LTTE, said that the money given by the billionaire to LTTE front outfits assisted “crimes against humanity”. Rajaratnam and his family’s foundation were sued for damage caused to them through such funding in the Sri Lankan civil war.

KAMAL NARANG

Ajith Nivard Cabraal, Central Bank of Sri Lanka Governor. Giving some solace to Rajaratnam, he said his assets in Sri Lanka would not be seized until he was proven guilty.

The lawsuit names Rajaratnam, his father J.M. Rajaratnam and the TRO foundation, which had a branch in New Jersey during the 2001-2007 period. The foundation’s funds have been frozen in both Sri Lanka and the U.S.

It accuses the three of “aiding and abetting, intentionally facilitating and/or disregarding crimes against humanity in violation of international law”. Rajaratnam gave at least $5 million to the foundation in 2005, to help rebuild areas devastated by the December 2004 tsunami.

Two years later, U.S. authorities found out that the TRO was funnelling money to the LTTE, which was on a U.S. list of banned terrorist groups.

The lawsuit was filed under the U.S. Alien Tort Claims Act, which allows non-residents to sue in U.S. courts for alleged violations of “the law of nations”. The complaint said that the accused “knowingly provided financial and material support to the LTTE with the intent to advance the LTTE’s terror campaign”.

Rajaratnam’s lawyer Jim Walden issued a statement to counter this: “The accusation that Rajaratnam supported the LTTE is flatly untrue and libellous, and we are confident that the court will dismiss these baseless charges.”

The second ‘missile’ came from the Sri Lanka Defence Ministry, on October 23. It announced that the LTTE’s arms procurer and Prabakaran’s successor, Kumaran Pathmanathan alias KP, had revealed during interrogation that Rajaratnam was a leading contributor of funds to the LTTE. It quoted KP as telling his interrogators that contributions from Rajaratnam to the LTTE were “intricately connected with the opposition politicians outside the LTTE but implementing a parallel political agenda with the terrorist group”.

KP, who was arrested in Kuala Lumpur, Malaysia, is now in government custody. He is being questioned on the LTTE’s connections, especially influential Western connections on its payroll, its leading donors, the group’s earnings from drugs and guns, and its intricate business empire.

“KP’s evidence of the LTTE receiving money from America’s biggest swindler of its stock market have been corroborated by two letters now in the hands of the U.S. intelligence,” the Defence Ministry said.

However, CBSL Governor Ajith N. Cabraal’s statements provide some solace to the beleaguered Rajaratnam. Cabraal told the English newspaper Daily Mirror that Rajaratnam’s local investment portfolio would remain unchanged and the CBSL would not seize his assets in Sri Lanka until he was proven guilty of financing terrorism. “Currently we are engaged in our own investigations on the investment portfolio of Rajaratnam and we are also inquiring into his involvement with the TRO.” He noted that Rajaratnam’s total asset portfolio in Sri Lanka was valued at approximately Sri Lankan Rs.12 billion.

The Central Bank, however, said that out of the total monies received by the TRO, one-third was provided by Rajaratnam. It pointed out that there was sufficient information that the TRO’s post-tsunami reconstruction activities in former LTTE-controlled areas were a hoax. A recent audit conducted by the CBSL, based on TRO data, found that no construction activity had taken place in these areas as stipulated by the TRO. According to CBSL estimates, the TRO had received $3.5 million for the reconstruction of schools, houses, water and sanitation projects, and roads.