MANHATTAN (CN) – Rajat Gupta and a key witness against him struggled to stay clean during testimony about inside tips involving jam-manufacturer Smuckers, which acquired Folgers coffee from Procter & Gamble.
Michael Cardillo, a former trader for now-defunct Galleon hedge fund, first took the stand on Friday against Gupta, a former board member for Goldman Sachs and Procter & Gamble, who is accused of leaking confidential information about both companies.
Though both men say they do not know each other personally, Cardillo claims that a Galleon co-worker told him that Gupta was an inside source for Raj Rajaratnam, a billionaire sentenced last year to 11 years in prison and fined $156.6 million.
Cardillo agreed to cooperate with the government shortly after the FBI busted him in the lobby of his apartment for his role in a separate Galleon conspiracy in late 2009.
He pleaded guilty to securities fraud. His sentencing date was delayed as prosecutors prepared him to testify against Gupta.
The crux of Cardillo’s testimony centers on closed-door conversations he claims to have had with R.K. Rajaratnam, Raj’s brother.
Assistant U.S. Attorney Richard Tarlowe on Friday struggled to elicit the first of these conversations; the defense objected to them as hearsay.
Eventually, U.S. District Judge Jed Rakoff took over questioning, and Cardillo testified that R.K. Rajaratnam told him that “he heard it from Raj’s guy on the P & G board,” without naming Gupta.
The information, in this instance, was that Procter & Gamble’s organic growth prediction would slow down from 4-to-6 percent growth to 2-to-5 percent growth.
Cardillo said he used the tip, shorted the stock, and made “a lot of money for my portfolio.”
On his second day of testimony, Cardillo said that R.K. Rajaratnam also credited the unnamed Procter & Gamble “guy” with information that the company would spin off Folgers coffee for Smuckers to acquire.
After this alleged conversation, Cardillo said, he bought 17,000 shares of Smuckers stock, but the effect of the trade was “minimal.”
“I didn’t make or lose a lot, I remember,” Cardillo said.
R.K. Rajaratnam, on the other hand, bought 75,000 shares in Smuckers, Cardillo said.
That trade accounted for roughly one-quarter of all Smuckers stock bought that day, according to Bloomberg data displayed as evidence.
As cross-examination began, defense attorney Gary Naftalis asked Cardillo how prosecutors prepared his testimony, including twice over the Memorial Day weekend.
Cardillo estimated that he had met with “between ten to 20 agents” from the FBI, five prosecutors and “maybe five” SEC attorneys over the course of roughly 3 years.
When Cardillo said that prosecutors spoke to him this past Saturday and Monday, Naftalis asked, “Sunday, you had off?”
Rakoff sustained the objection that followed.
Visibly tense, the young trader appeared slumped and red-faced throughout both direct and cross-examination. He grew defensive as Naftalis grilled him about the seedier aspects of the inside trading crimes to which he has admitted.
Under questioning, Cardillo told the jury that his co-conspirator Craig Drimal set up a bank account with $50,000 in it for him to collect roughly $1,000 in regular increments with an ATM card.
Drimal was sentenced last year to 66 months in prison.
Cardillo’s grilling was expected to conclude today, and another cooperating witness, Anil Kumar, may take the stand.
Kumar, a former executive from McKinsey & Co., is another Galleon co-conspirator with no direct connection to Gupta. The government is offering his testimony to demonstrate how alleged inside-trading crimes operate under strict secrecy.
Defense attorneys for Gupta have objected to what they call an excessive reliance on circumstantial, hearsay and speculative evidence.
Rakoff has countered that circumstantial evidence can be as valid as direct evidence, and that certain crimes do not leave a paper trail.
He illustrated the concept with an absurd hypothetical on Friday.
“Mom, I had a great day at camp. Today, I murdered my counselor,” Rakoff said.
Even one of Gupta’s daughters, seated in the front row, laughed at that one.