Galleon Group, whose founder has been charged with masterminding the biggest-ever insider-trading scheme involving hedge funds, is shutting down.

Less than a week after being arrested at his New York home, Raj Rajaratnam told investors and employees in a letter that he was winding down the Galleon funds. He initially said he planned to keep his 12-year-old firm intact.

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, the 52-year-old billionaire wrote.

Rajaratnam, who says he is innocent, said in the Wednesday letter that he plans to defend himself against the charges in the same way he managed money -- with intensity and focus.

His New York-based firm, which managed $3.7 billion at the end of last week and boasted strong returns through September, has attracted potential buyers, a source familiar with the matter said.

Federal prosecutors accused Rajaratnam and five other individuals of illegally trading on nonpublic information in a scheme that netted them $20 million. Rajaratnam is free on $100 million bail.

The news that Galleon was shutting down was hardly a surprise. Many Galleon investors, ranging from endowments to wealthy individuals, have asked for their money back, and many of the firm's 130 employees are looking for new jobs.

I would imagine it is hard to have an ongoing business when you are dealing with an issue like this, said Dick DelBello, senior partner at hedge-fund service provider Conifer Securities. So, I am not surprised.

Pressure on Galleon has built since Rajaratnam and the other five accused were arrested on Friday. By Monday, investors had asked the firm to return $1.3 billion. Under ordinary circumstances, investors would have to notify Galleon by the middle of November of their plans to exit, and they would get their money 45 days later, in early 2010.

To raise cash, Galleon traders began selling off positions this week. Because the funds invested primarily in large and heavily traded companies like Apple Inc , Google Inc and Bank of Americs Corp , investors expect to see their money returned promptly in January, one investor said.

Soon after Rajaratnam was arrested, some of his portfolio managers and analysts began looking for new jobs in an industry that only recently began hiring again after heavy losses in 2009.

Galleon had some top-flight people, and why should their careers be ruined only because they got caught up with the wrong leader? said Brad Alford, founder of Alpha Capital Management, an advisory firm that invests in hedge funds. Some of the top shops are picking over the wreckage already.

While news of the insider-trading scandal came as a shock, many lawyers and investors feel it will hurt Rajaratnam rather than the entire hedge fund industry.

This shows that regulators are doing their jobs, and that might be a positive thing for the industry, said Marc Gottridge, a partner at law firm Lovells LLP.

Lawyers and industry observers agree that this marks the end of Rajaratnam's once flourishing career, which allowed him to rub shoulders with the world's savviest investors and top government officials.

His degree from the University of Pennsylvania's prestigious Wharton School and his knack for building a team of top investors turned Galleon into one of world's most prominent technology hedge funds, along with Pequot Capital and Bowman Capital. Pequot and Bowman have also closed.

Now his name is totally toxic and will go down in the annals of hedge fund history as a prominent failure, Alpha Capital's Alford said.

(Reporting by Svea Herbst-Bayliss and Joseph Giannone; editing by John Wallace)

Investment Raj Rajaratnam Down