The second week of Galleon Group founder Raj Rajaratnam's insider-trading trial ended yesterday with tapes and testimony showing how Rajaratnam allegedly received—and gave—confidential information.
Prosecutors made their case that Rajaratnam, wearing a green tie in court on St. Patrick's Day, traded on advanced knowledge of outsourcing company PeopleSupport's impending acquisition by an Indian firm. And, they said, he got it by placing one of his hedge fund's own managing partners on PeopleSupport's board.
Early in 2008, Rajaratnam pledged to end his activism towards PeopleSupport, in which Galleon held a 25% stake, in exchange for a seat on its board. The seat was filled by Krish Panu, a former Galleon partner.
Panu has not been formally accused, either civilly or criminally, of any wrongdoing. But prosecutors said that he provided Rajaratnam with a steady stream of information about PeopleSupport.
On one wiretapped conversation between Rajaratnam and Panu, the latter promises to pass along the "headlines" of a recent board meeting, which included talk of a potential acquisition. Panu told his boss that PeopleSupport CEO Lance Rosenzweig was in India to meet with potential buyers.
Testifying yesterday, Rosenzweig said that his trip to India was not public information.
Prosecutors also played several tapes showing that Rajaratnam didn't keep the information to himself. The jury heard him discuss the PeopleSupport situation with Rajiv Goel, a friend and Intel Corp. executive who has pleaded guilty to passing confidential information about his and other companies to Rajaratnam.
"So the Ruias made a firm bid now in the amount, $12.25," Rajaratnam told Goel five days before the Ruias' Essar Group's offer for PeopleSupport was announced.
"Oh, wonderful. Wonderful, thanks," Goel responded.
Two months later, Essar ran into trouble due to the financial crisis, and moved to extend the closing date of the deal. According to Rosenzweig, his company's stock "dropped precipitously" on the news, but Rajaratnam wasn't worried: He allegedly bought 30,000 PeopleSupport shares for Goel's personal brokerage account.
"I'm 100% sure," Rajaratnam tells Goel. "We know because one of our guys is on the board. I can't buy any more because I own 25% of the company. They have a poison pill, right?"
"We know that they're gonna put $41 million in escrow," Rajaratnam said. "And I know they're gonna close Oct. 31."
A day later, a closing date—Oct. 31—was announced, sending PeopleSupport shares soaring.
A member of Rajaratnam's defense team, cross-examining Rosenzweig, pointed out that Galleon's stake in PeopleSupport actually fell from 26.3% to 25.1% before the Essar deal was announced; Rosenzweig said that could have been due to PeopleSupport issuing more shares and not because Galleon sold any of its stake.
Terence Lyman also sought to show that PeopleSupport had been the subject of takeover rumors for months before the Essar deal was announced. Rosenzweig also testified that, at the time of Rajaratnam's second call to Goel, "everything was still in flux," as Lyman put it.
Rosenzweig also said he knew nothing about Galleon's trading in PeopleSupport shares.