NEW YORK (Bloomberg) — Every weekday at 8.35 a.m., Galleon Group's 70 analysts, portfolio managers and traders pack into a conference room on the 34th floor of the IBM Building, a gray-green polished granite skyscraper on New York's Madison Avenue. Tardy arrivals are fined $25.

At the head of the table, chief executive officer Raj Rajaratnam fires off questions to the staff of his $3.7 billion hedge-fund firm: Which companies' margins are peaking? What would change your mind about this stock? What's the risk of that company failing to win an expected contract? The 52-year-old billionaire expects his analysts to have an edge: better information than anyone else, say people who have attended the meetings.

US prosecutors allege that Rajaratnam's own edge was illegal. He was arrested on October 16 at his home on Manhattan's Sutton Place, charged with using inside information to trade shares including Google Inc., Polycom Inc., Hilton Hotels Corp. and Advanced Micro Devices Inc., according to complaints. Five other defendants also were arrested in New York and California in a $20 million scheme that prosecutors say is the largest-ever insider trading case involving hedge funds.

"Every trader wants an edge, and there are many gray areas when it comes to aggressive research," said Ron Geffner, a lawyer at New York-based Sadis & Goldberg LLP, whose clients include hedge funds. "But if you trade on material, non-public information that comes from a company insider who is breaching his fiduciary duty, odds are that it is illegal."

Rajaratnam's net worth of $1.3 billion makes him the 559th richest person in the world, according to Forbes Magazine, on par with the likes of hedge-fund manager Julian Robertson and investor Wilbur Ross. Rajaratnam has invested in at least two New York City restaurants, Opia, in midtown Manhattan, according to people who know him, and Rosa Mexicano.

Galleon was among the 10 largest hedge funds in the world in the early years of this decade, and it managed $7 billion at its peak in 2008. It also was one of the three largest technology hedge funds along with Lawrence Bowman's Bowman Technology Fund, which closed in 2001, and Daniel Benton's Andor Capital Management LLC, which shut down last year.

Galleon's $1.2 billion Diversified fund has climbed 21.5 percent a year, on average, since 1992, according to a September marketing document from the firm, compared with 7.6 percent for the Standard & Poor's 500 Index of the largest US companies. The fund has returned 22.3 percent this year, according to an investor letter.

As Rajaratnam's wealth grew, he and his wife Asha Pabla, who have three children, created a family foundation and have given money to fight Aids in India. They donated $5 million to help the 2004 tsunami victims in his home country of Sri Lanka, where Rajaratnam was on vacation with his family when the disaster struck.

The foundation donated $400,000 in 2005 to the Tamils Rehabilitation Organisation in Cumberland, Maryland, according to tax forms filed by the foundation with the Internal Revenue Service. Two years later, the US Treasury Department froze the assets of the charity, saying it was a front for the Liberation Tigers of Tamil Eelam, or LTTE, which the State Department had designated as a terrorist group 10 years earlier.

"His donation was responsible for rebuilding thousands of homes for Tamils, Sinhalese, and Muslims without discrimination," Dan Gagnier, a spokesman for Galleon, said in an e-mailed statement.

Sri Lanka authorities will review "significant" transactions carried out by Rajaratnam, Channa De Silva, director general of the Securities and Exchange Commission of Sri Lanka, said in an interview yesterday. The agency will "collaborate" with foreign governments in their investigations.

"We don't want a market glazed with investors of this reputation and will make every attempt to keep the Sri Lankan market clean," De Silva said.

Born in Sri Lanka's capital, Colombo, Rajaratnam was educated there at St. Thomas Preparatory School before leaving for England, where he studied engineering at the University of Sussex. He came to the US to get his master's of business administration, graduating from the University of Pennsylvania's Wharton School in 1983.

His first job after graduation was at Chase Manhattan Bank, where he was a lending officer in the group that made loans to high-tech companies. In 1985, he joined Needham & Co., a New York-based investment bank that specialised in technology and health-care companies. He started as an analyst covering the electronics industry and rose through the ranks, becoming head of research in 1987, chief operating officer in 1989 and president in 1991. A year later, at 34, Rajaratnam started a fund, Needham Emerging Growth Partners LP, according to Galleon's marketing documents.

Rajaratnam and Needham colleagues Krishen Sud, Gary Rosenbach and Ari Arjavalingam formed Galleon Group in January 1997. By the end of that year, they were managing $830 million, much of it from technology company executives Rajaratnam had gotten to know throughout his career, according to "The New Investment Superstars: 13 Great Investors and Their Strategies for Superior Returns", written by Lois Peltz (John Wiley & Sons Inc., 2001).

As the Internet bubble burst in 2000, the Galleon Diversified Fund climbed 43.7 percent in the three-year period through 2002, while the S&P 500 dropped 37.6 percent.

Galleon's assets jumped to $5 billion by 2001, making it one of the 10 biggest hedge funds in the world. That year Sud, who was co-head of the firm's health-care fund and who had been friends with Rajaratnam since the two were classmates at Wharton two decades before, left to start his own firm, taking six employees with him.

Rajaratnam faces 13 fraud and conspiracy counts, many of which carry 20-year maximum sentences. Under federal sentencing guidelines, he faces 10 years in prison if convicted at trial, Assistant US Attorney Josh Klein said in court on October 16.

Prosecutors also charged Rajiv Goel, who worked at Intel Capital as a director in strategic investments, Anil Kumar, who worked as a director at McKinsey & Co., International Business Machines Corp. executive Robert Moffat, and former officials at Bear Stearns Asset Management Danielle Chiesi and Mark Kurland, who were affiliated with the firm's $1 billion New Castle Partners.

Moffat ran one of five major businesses at IBM, the world's largest computer-services provider, and reported to chief executive officer Sam Palmisano. The Armonk, New York-based company placed Moffat on temporary leave and Rodney Adkins was put in charge of his group on an acting basis, Edward Barbini, an IBM spokesman, said yesterday.

Yolande Daeninck, a spokeswoman for McKinsey, said the firm is "distressed" by Kumar's arrest. Chuck Mulloy, an Intel spokesman, said the company is investigating and has put Goel on leave.

At the hearing, US Magistrate Judge Douglas Eaton in Manhattan set Rajaratnam's bail at $100 million, to be secured by $20 million in assets and guaranteed by his wife and four others. Rajaratnam, who gave up his passport, may not travel more than 110 miles from New York City.

Klein asked Eaton to hold Rajaratnam in jail pending his trial. He said the hedge-fund manager had "enormous incentive" to flee to his native Sri Lanka or elsewhere. The prosecutor said there's additional evidence, there may be more charges against Rajaratnam and that the evidence is "overwhelming".

Defence attorney Jim Walden said in court that prosecutors are misconstruing the evidence against Rajaratnam and that the case isn't as strong as prosecutors allege.

Prosecutors say Rajaratnam traded on leaks from insiders at Polycom, Moody's Investors Service Inc. and Market Street Partners. In another alleged scheme, Chiesi got tips from an unidentified person at Akamai Technologies Inc. and from Moffat, according to one of the criminal complaints. These tips generated others, prosecutors said, as Chiesi passed them onto to Rajaratnam, who in turn gave Chiesi inside information.

The government's complaint quotes conversations between Chiesi and Rajaratnam, including a July 24, 2008, discussion that they allegedly had after she spoke to the person at Akamai. That day, Akamai stock had closed at $32.18.

"Akamai," Chiesi told Rajaratnam, according to the complaint. "They're gonna guide down. I just got a call from my guy."

After Chiesi said that the company's comments would bring the stock down to $25 a share, Rajaratnam replied that he would be "radio silent" and asked when Akamai would report, according to the complaint.

Galleon said in an October 16 statement after Rajaratnam's arrest that the firm "continues to operate and is highly liquid".

While there is no key-man clause that would allow investors to pull out based on Rajaratnam's arrest, investors in the Diversified and Buccaneer's Fund can withdraw their money on a quarterly basis with 45 days notice, according to marketing documents.

Galleon's portfolio managers include Jeff Bernstein, who runs the Diversified Fund, and Leon Shaulov, the senior manager of the Galleon Buccaneer's Fund, a short-term trading fund.

Retaining top managers and holding on to clients may prove challenging in light of the investigation, said Craig Lilly, a Palo Alto, California-based attorney at Squire, Sanders & Dempsey LLP, whose clients include hedge funds.

"This may spell the end of the firm," Lilly said. "They will probably face a tremendous wave of redemptions as well as brain-drain as senior people head for the exit door."