Rajaratnam trial lawyers push research defense
Raj Rajaratnam did not pick stocks alone. He had a team of researchers at his Galleon Group hedge fund to grind through the rumor mill and anticipate a good bet.
This is the thrust of every cross-examination of government witnesses at Rajaratnam's insider trading trial in New York.
Similarly on Thursday, former Galleon portfolio manager Adam Smith acknowledged under questioning that there were a number of rumors about a possible merger of chipmakers Advanced Micro Devices Inc and ATI Technologies months before the announcement of a $5.4 billion deal on July 24, 2006.
But Smith also said: The speculation was public. The fact that it was happening was not public.
Smith, 39, on his third day on the witness stand in Manhattan federal court, has testified that he was tipped in May 2006 by a Morgan Stanley banker, Kamal Ahmed, who gave confidential details of AMD's interest in buying ATI.
Smith said he then told Rajaratnam, who is charged with 14 counts of conspiracy and securities fraud in making $45 million in illicit profit between 2003 and March 2009, mostly on tech stocks. His lawyers contend that research and market speculation, not material company secrets, guided his trades.
Smith is among 19 people who have pleaded guilty in the sweeping Galleon case, which is described by prosecutors as the biggest probe of hedge funds in history.
The trial began on March 8 and will resume on Monday.
Defense lawyer Terence Lynam showed emails to the jury and Smith to argue that AMD's potential acquisition of ATI was so widely known by early July 2006 that shareholders were writing to top AMD executives about the possible deal.
But in additional questioning after the cross-examination, the government sought to reinforce its allegation that Galleon and Rajaratnam relied on inside information. Smith was asked by prosecutor Andrew Michaelson about a conference call on July 5, 2006, between ATI chief executive David Orton and Galleon technology researchers.
What did he tell you about the possible acquisition by AMD? Michaelson asked Smith. Nothing, he replied.
No charges have been announced against Ahmed, who has been put on leave by the investment bank.
On Thursday, the jurors also heard that alleged tips by Ahmed on a 2005 merger announcement between Integrated Device Technology IDT and Integrated Circuit Systems Inc (ICST) led to $2 million in trading profits for Rajaratnam.
The defense said Rajaratnam's trades were based on internal Galleon research. Smith told the jury he would periodically check in with Ahmed in the months leading up to the deal's announcement and would send Rajaratnam emails about its status.
Prosecutors pointed to internal Galleon trading records indicating that Rajaratnam bought $3 million worth of ICST stock days after an email on March 17, 2005, from Smith to Rajaratnam about the deal that said game on. Prosecutors said Rajaratnam dumped the stock after the June 15 announcement of IDT buying ICST.
The trial is notable for dozens of recordings of FBI taps on Rajaratnam's mobile phone that have been played for jurors.
On Wednesday, the jury heard on a phone tap that Rajaratnam had advance knowledge from a Goldman Sachs Group Inc director that in October 2008, the Wall Street bank was on its way to its first quarterly loss as a public company.
I just heard from somebody who's on the board of Goldman Sachs, they are gonna lose $2 per share, Rajaratnam was heard telling David Lau, who ran Galleon's office in Singapore, on October 24, 2008. So what he was telling me was that, uh, Goldman, the quarter's pretty bad.
The director was Rajat Gupta, who has since left the Goldman board. Indian-born Gupta, 62, is also the former worldwide head of elite McKinsey & Co management consultancy. Prosecutors describe him as an unindicted co-conspirator in the case and he is facing civil charges by U.S. market regulators.
The case is USA v Raj Rajaratnam et al, U.S. District Court for the Southern District of New York, No. 09-01184.
(Additional reporting by Basil Katz; Editing by Ted Kerr, Gary Hill)
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