Unusual trading in shares of Hilton Hotels detected by the New York Stock Exchange in 2007 contributed to the investigation that led to billionaire investor Raj Rajaratnam and five other individuals being charged with insider trading last week.

After detecting “unusual activity and after investigating we referred them to the SEC,” said NYSE Regulation on Monday.

The NYSE, which is overseen by the US Securities and Exchange Commission, monitors intra-day trading and is in the front line of defence against illegal activity.

It also emerged on Monday that some of the largest investors in hedge funds had for years harboured concerns about Galleon Group, founded by Mr Rajaratnam, according to the content of due diligence reports disclosed to the Financial Times.

Inconsistencies and red flags over the “source of alpha” – industry parlance for market-beating profits – were noted in reports commissioned by several large investors. Each passed up the opportunity to invest in Galleon as a result, in spite of the fund’s reputation and stellar record.

Mr Rajaratnam allegedly made a $4m profit in July 2007 by buying 400,000 shares in Hilton after receiving non-public information about the impending purchase of the hotel chain by Blackstone, the private equity group, according to criminal documents filed last week by prosecutors.

The information allegedly came from a Moody’s Investors Service analyst and was passed to Mr Rajaratnam by an individual who became a government informant four months later. The criminal case was built largely on information provided by that informant and wire taps of phone conversations.

The Hilton trade was followed about two weeks later by trading in Google stock, another one of the transactions highlighted in the criminal complaints.

The NYSE said it detected and referred unusual trading in shares of Advanced Micro Devices to the SEC a year later. Danielle Chiesi, an employee of New Castle, a hedge fund set up by Bear Stearns, allegedly conspired with Mr Rajaratnam on the AMD trades.

Mr Rajaratnam’s lawyer said his client was innocent and would fight charges in court.
He has posted $100m bail and surrendered his passport.

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