2nd UPDATE: Galleon Group Winding Down All Hedge Funds

Galleon Group is winding down all its hedge funds, company founder Raj Rajaratnam told employees and investors in a letter Wednesday.

Rajaratnam was one of six people arrested and charged last Friday in a massive insider-trading case. The charges had already caused many Galleon investors to try to withdraw their money. The deadline for redemption requests in most of Galleon's funds is Nov. 15.

"I have decided that it is now in the best interest of our investors and employees to conduct an orderly wind down of Galleon's funds while we explore various alternatives for our business," Rajaratnam wrote.

According to a person familiar with Galleon, one of those alternatives is selling Galleon to another firm. The person said that some parties have expressed interest in buying Galleon.

The person added that Galleon's redemption process will remain unchanged. Investors won't get their money back until Jan. 1, 2010, unless the government intervenes.

"They don't know exactly when this process will conclude," the person said. "But based on what they know right now, it will not be inconsistent with their standard redemption policies."

In the letter, a copy of which was reviewed by Dow Jones Newswires, Rajaratnam said he is innocent of all charges. He also touted Galleon's research process and said the firm wants to keep together "the best long/short equity team in the business."

Since Rajaratnam's arrest, Galleon managers have sold some stock to take cash where they could. Many of Galleon's holdings are stocks of large companies like Ebay Inc. (EBAY) and Apple Inc. (AAPL), which usually don't move much when one small shareholder sells.

But Galleon has somewhat significant stakes in some other U.S. stocks, like drug company OSI Pharmaceuticals Inc. (OSIP) and management adviser Huron Consulting Group Inc. (HURN). It's possible that those stocks could drop in the short term if Galleon sells, but movements in these shares have been consistent with the overall market in recent days.

Galleon, which manages $3.7 billion, also owns stocks of several companies based in Sri Lanka, where Rajaratnam was born. Many of those stocks dropped in the days following his arrest.

All of Galleon's main hedge funds are up double digits in 2009, so the "orderly" wind-down will consist of selling many stocks that have gained this year. That's more desirable than having to sell while stock prices are dropping.

Hedge-fund managers that are closing funds often attempt these slower, more orderly sell-offs of their holdings to avoid disrupting the stocks or the markets.

 
 -By Joseph Checkler, Dow Jones Newswires; 212-416-2152; [e-mail]