Monday, 8 February 2016
Last updated 2 days ago
Mar 30 2011 | 10:21am ET
After weeks of testimony from people—including alleged tipsters—from outside of Galleon Group, prosecutors for the first time took jurors inside the once multi-billion dollar New York hedge fund.
Former Galleon trader and portfolio manager Adam Smith testified that he received and traded on insider-information about four companies, with the knowledge and approval of Galleon founder Raj Rajaratnam. Rajaratnam, with whom Smith said he also shared tips, is on trial for running a $50 million insider-trading ring.
Smith, who pleaded guilty in January to insider-trading and testified that he continued to trade illegally after leaving Galleon and after Rajaratnam's October 2009 arrest, told jurors that he was "tasked" by Rajaratnam with "doing research" and getting an edge."
Asked by prosecutors to explain what he meant, Smith said, "research is sort of doing your homework ahead of time. Getting the number is more like cheating on the test."
"Did you do your homework on Intersil" Corp., a microchip maker, Assistant U.S. Attorney Andrew Michaelson asked.
"Yes," Smith said.
"Did you also cheat on the test?"
"Yes," Smith admitted.
Smith said that Rajaratnam knew that he was seeking out and trading on insider information, and encouraged him. The Galleon founder was involved from the very beginning of Smith's illegal trading in 2004, Smith said.
Smith said he began getting confidential information about Intel Corp. after being introduced—through an expert-networking firm—to Michael Tomlinson, who worked for the semiconductor giant. Tomlinson allegedly told Smith that his brother could get revenue and growth numbers.
"I proposed that we strike a deal," Smith said. Of Rajaratnam, he added "I told him exactly what our contact was," and that Rajaratnam approved.
That first experiment in insider-trading petered out after Tomlinson's brother was transferred, Smith explained. In a March 2005 e-mail, he warned Rajaratnam that Tomlinson was "having trouble quantifying the outlook" and that he had "the feeling we're not going to get a specific number before Thursday."
"This is disappointing," Smith wrote. "I've told him he needs to do better."
Tomlinson didn't. But Jason Lin, an engineer with Intersil, did, Smith said. Smith said his relationship with Lin began when he worked at Morgan Stanley, and that he would travel to Taipei, Taiwan, once a quarter to meet with Lin. At first, they discussed "more qualitative types of information," but "there did come a time when he was able to give me Intersil's quarterly revenue numbers," Smith said.
Smith said he passed the tip to Rajaratnam.
"I was getting an edge on a company I covered," Smith said. "My motivation was to improve the profitability of my firm and to help Raj."
Smith also said he passed tips from a former Morgan Stanley colleague, Kamal Ahmed, to his boss. In 2005, Ahmed, who has not been charged with any wrongdoing and has denied the allegations, told Smith about an impending merger, Smith testified.
"I shared it with Raj," Smith said. "You can make a lot of money with very little risk."
Indeed: Shares of one of the merging companies soared more than 10% after the deal was announced.
"I remember after the announcement having a sinking feeling in my stomach that this could be a problem," Smith told jurors. "I had a moment of worry."
Smith testified that Ahmed "wasn't authorized to tell me" the confidential information.
Another source was inside Galleon: Smith said that Rajaratnam called Joseph Liu, a Galleon analyst in Taiwan, "the 'axe' in Synaptics" Inc.
"The 'axe' is a general term used on Wall Street to mean someone who is very good at predicting which way the stock will move," Smith said.
Smith testified that Rajaratnam urged him to "be vague" in written communications. His boss directed employees "to communicate sensitive information verbally or over the phone, but not in written form."
Smith added that he shared his insider tips only with Rajaratnam, knowing that his other Galleon colleagues could not be trusted to keep the information secret.
But some at the firm certainly seemed to know what was going on. Prosecutors played one of the thousands of wiretaps at the center of the case on which Rajaratnam tells two other Galleon executives what he called "confidential" information.
"We just have an e-mail trail," Rajaratnam said, allegedly urging them to cover their tracks by pretending that the information was arrived at honestly and through legitimate research.
Smith's testimony is set to resume this morning.