MANHATTAN (CN) - A prosecutor said that billionaire Raj Rajaratnam, who co-founded the Galleon hedge fund, learned that Intel planned to invest about $1 billion with Clearwire, as part of a $3.2 billion deal with several other companies, a day after the deal had been confirmed and months before its public announcement.
The government played several wiretaps on Monday afternoon in which former Intel executive Rajiv Goel appears to give Rajaratnam inside information about the investment. Goel, who was also working in Intel's treasury department at the time, pleaded guilty to his role in the scheme and is now reportedly a key cooperating witness for the government.
Assistant U.S. Attorney Reed Brodsky played the recordings without introducing them into evidence.
Rajaratnam is accused of making $45 million in what the government calls the largest insider-trading scheme in history, which has brought guilty pleas from more than 15 alleged associates and tipsters.
Goel allegedly leaked Rajaratnam confidential information related to the Clearwire deal in a series of phone calls.
In one transcript, Goel says, "[Y]esterday our board approved this deal."
Brodsky rolled the tape during the testimony of Sriram Viswanathan, an executive for Intel, one of the major contributors to this investment.
A May 7, 2008, press release announced that Intel joined with Google, Comcast, Time Warner Cable and Bright House on a $3.2 billion investment in Clearwire, which was developing its "next generation" of 4G broadband Internet with Sprint. Prosecutors say Goel informed Rajaratnam that Intel would front a third of the investment one day after the company's board signed on.
Defense attorneys for Rajaratnam maintained that the Galleon founder learned of the allegedly privileged information from news articles and analyst reports.
When questioned on these public sources of information, Viswanathan drew a clear distinction between press speculation and formal announcements.
"It is a fact that there was a lot of speculation about the possibility," Viswanathan said.
Defense attorney Terence Lynam replied that, speculation or not, signs pointed to a deal, and the market reacted.
In December 2007, Intel executive Arvind Sodhani announced in a press release that he would resign from the Clearwire board of directors to avoid a conflict of interest.
Lynam said that various news outlets speculated on the meaning of his resignation in January 2008, causing a 25 percent spike in Clearwire's stock.
Evidence showed that the business publication Tech Trader Daily reported that Clearwire stocks "soared" based on one such story in Wall Street Journal.
On Monday morning, prosecutors introduced evidence that suggests Rajaratnam made another $4 million through a now-fugitive's tip on the 2007 acquisition of the Hilton hotel chain.
As indictments against Galleon co-conspirators multiplied, the Hilton tipster, Deep Shah, never returned from a "vacation" he took to India in December 2007 to visit his sick father, a government witness testified on Monday. Shah was reportedly declared a fugitive two years ago for his alleged role in the scheme.
Prosecutors say Shah informed Galleon employee Roomy Khan on July 2, 2007, that the private equity group Blackstone planned to acquire Hilton.
The deal was announced a day later, after the stock market closed, evidence showed. Before the closing bell rang, however, Galleon bought about 400,000 shares of stock in Hilton. Those shares earned the hedge fund $4 million, Assistant U.S. Attorney Andrew Michaelson said.
Government witness Margaret Holloway, a Moody's senior analyst, testified Monday morning that she discussed the confidential matter with her co-worker Shah, in the normal course of determining the credit rating of the hotel chain. She is not accused of any wrongdoing.
Countering that the alleged inside trades came from vigorous, legal research of the market, defense attorney Michael Starr showed the court some examples, including two analyst reports strongly urging investors to buy Hilton shares days before the public disclosure of Blackstone's acquisition.
One report from UBS, dated July 2, 2007, cited Hilton as a "Top Pick." Another report from Jefferies & Co. a day later called Hilton the "Pick of the Week," and noted that three other hotel chains recently had been purchased by private equity firms.
Rumors about Blackstone's prospective acquisition of Hilton had been circulating for months, Starr said.
A Lehman Brothers employee also sent three Galleon employees an e-mail on May 31, 2007, strongly urging the hedge fund to buy Hilton shares, evidence showed.
"I KNOW THE STOCKS ARE MOVING BUT I STILL THINK THEY ARE A BUY!" the e-mail said.
On redirect, Michaelson said that Galleon's 400,000 share purchase of Hilton stock was timed within hours of the suspected phone call from Shah to Khan.
Holloway testified that she received a call at 2:15 p.m., informing her of the deal's impending public announcement. She added that she told Shah about the conversation shortly after it occurred.
The government displayed a chart of the hourly movements of Hilton's stock in early July 2007.
Holloway said that its value "started to creep up" shortly after her conversation with Shah.
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