Hedge fund firm Galleon Group said it is winding down its funds, less than a week after its founder was arrested and charged with running one of the biggest insider-trading schemes ever involving a hedge fund.

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, Raj Rajaratnam, the fund firm's 52-year-old billionaire founder, said in a letter to investors and employees on Wednesday.

Galleon, which managed $3.7 billion at the end of last week and boasted strong returns through September, has attracted some potential buyers, a source familiar with the matter said. The source declined to give details.

Rajaratnam and five other individuals are accused of illegally trading on nonpublic information. Prosecutors say the scheme netted more than $20 million.

News that Galleon is closing down did not surprise hedge fund industry investors and analysts. Rajaratnam's arrest was thought to be a fatal wound for the 12-year-old firm because both investors and employees would want out.

Investors ranging from college endowments to wealthy individuals began demanding their money back immediately after the news of the arrest broke on Friday. By Monday, redemption notices had already topped $1.3 billion, a source familiar with the matter said.

Galleon analysts and portfolio managers are beginning to seek employment elsewhere, with many worried that their time at Galleon might hurt them with future employers.

Rajaratnam, who has said 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.

He said Galleon's funds are liquid and its employees -- roughly 130 people -- are seeking the best way to keep together what I believe is the best long/short equity team in the business.

Despite these assurances, investors are determined to get their money out as quickly as possible, lawyers familiar with the matter said.

Under ordinary circumstances, Galleon investors would have to notify the firm by November 15 of their intention to exit, and they would not receive their money before January 1.

Galleon traders were reported selling stakes in healthcare and other stocks this week in an effort to raise cash to meet redemption requests, people familiar with the matter said.

It is not unusual for hedge funds to try to snap up teams of analysts and portfolio managers from rivals, or buy portions of rivals' funds. In 2007, hedge fund Citadel Investment Group acquired the troubled credit portfolio of Sowood Capital, which was going out of business.

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

Raj Rajaratnam Investment Down