Defense Calls First Witnesses in Galleon Trial

MANHATTAN (CN) - Lawyers for Galleon hedge fund co-founder Raj Rajaratnam called two witnesses to the stand Monday to undermine charges that their client made $63 million in the largest insider-trading scheme in history.

Polaris Investment Partners executive John Pernell told the court that he had a breakfast meeting at the Cornell Club with his "dear friend," Adam Smith, an alleged Rajaratnam co-conspirator, shortly after the government accepted that associate's guilty plea to related charges.

Pernell says Smith confided in him that he had admitted to a lie. Three or four of the five to six transactions that Smith had pleaded guilty to executing were not based on inside information, Pernell said.

More than 15 of Rajaratnam's alleged associates and co-conspirators, including Smith, have pleaded guilty to some role in the fraud. Smith, a former Galleon analyst and trader, previously testified for the government that he got a "sinking feeling" when he learned that an inside tip that he shared with Rajaratnam led to successful trades.

Pernell agreed when Assistant U.S. Attorney Jonathan Streeter reasoned that the other trades, implicitly, must have been based on tips.

Streeter pressed Pernell to further agree that even if Smith had not "executed" other inside trades, he could have taken part in a conspiracy involving them.

As a former Galleon investor, Pernell said he had every reason to hope that Rajaratnam was not involved in criminal activity. The witness pointed out, in a testament to his own due diligence, that he had balked at investing with Bernard Madoff before the government discovered caught wind of the former investment adviser's giant Ponzi scheme.

After Pernell's 30-minute testimony, an attorney with Rajaratnam's defense team took the stand.

Robert H. Hotz Jr., a former prosecutor who is now with Akin Gump Strauss Hauer & Feld, said that he represented Rajaratnam personally until August 2010. He said he stepped down after twice interviewing Smith about the case.

During those interviews, Smith denied placing inside trades for Rajaratnam, and said that a lead from his alleged Morgan Stanley tipster Kamal Ahmed was an "unsolicited," "offhand" remark, Hotz said.

Under cross-examination from Streeter, Hotz acknowledged that Smith made the remarks at a voluntary meeting where he was not under oath, and at a time when he was an unindicted co-conspirator in the crime.

Streeter asked whether Hotz, as a defense attorney and a former prosecutor, could appreciate that witnesses are not always immediately truthful at privileged meetings.

"I'm familiar with the concept of people not telling me the truth," Hotz said to laughter in the courtroom.

Streeter added that sometimes lawyers make tactical decisions to avoid asking questions when the answer might elicit answers that could incriminate their client.

Hotz acknowledged that he did not question Smith about Xilinx, Goldman Sachs, Hilton and eBay, whose stocks Rajaratnam allegedly traded on based on inside tips.

The questions he asked Smith were broad enough, however, to include the stocks of all four companies, Hotz insisted.

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