MANHATTAN (CN) – Records entered into evidence on Thursday show a short window between the times of apparent tips and the actual trading activity of man accused of masterminding the largest insider-trading scheme in history.
The admission of this evidence occurred, ironically, as defense attorneys for Galleon hedge fund co-founder Raj Rajaratnam tried to suggest that their client’s trading patterns contradicted allegations that he benefitted from inside knowledge.
Adam Smith, a former analyst and portfolio manager at Galleon, told the court that Rajaratnam urged him to “make some sales before mergers” as a way to dull the evidence of wrongdoing.
But the prevailing pattern of Rajaratnam’s trades, Smith said, reflect Rajaratnam gaining millions from inside knowledge. Prosecutors say the total is about $45 million.
On Tuesday, Smith said he also got tips from Morgan Stanley banker Kamal Ahmed about the merger of Integrated Circuit Systems and Integrated Device Technology. Evidence showed that Smith referred to this deal as “eyes,” a play on the first initial of both companies, in private e-mail communications with Rajaratnam.
Assistant U.S. Attorney Andrew Michaelson displayed these e-mails side by side with the trading records to demonstrate that Rajaratnam watched the “eyes” closely when trading.
One March 9, 2005, e-mail with the subject line “The two eyes” refers to an “update” of a deal that is still on track, evidence showed. Rajaratnam bought about 500,000 shares of stock weeks before this “update,” worth $10 million, Smith said, analyzing the trading records.
The records also demonstrated that Smith’s former Galleon co-worker, Ali Far, also purchased these stocks around the same time. Far and Smith are two of the more-than 15 alleged associates and tipsters who have pleaded guilty to the alleged inside trading conspiracy
In another March 17, 2005, e-mail to Rajaratnam, Smith refers to the company Epiphany Technologies by its stock symbol EPNY, but alludes to the Integrated Circuit Systems and Integrated Device Technology merger again by the code name “eyes.”
Within a week of this e-mail, Rajaratnam bought 150,000 shares of stock, worth $3 million, Smith said.
Defense attorney Terence Lynam had tried to unravel Smith’s testimony by pressing him to agree that Rajaratnam purchased stock in ATI Technology based on research, rather than knowledge of its future acquisition by Advanced Micro Devices.
Lynam displayed several e-mails and internal documents that Smith authored at Galleon that indicated ATI was a good investment choice.
Smith had told the FBI that those e-mails and documents were “cleaning paper in the file” to legitimize insider trading, but Lynam said the documents were remarkably accurate for fluff.
On cross-examination, Smith agreed that the reasons he gave in those documents were true, but said they represented only one “torpedo in the water” for trading in the stock.
Smith had explained Tuesday that the other “torpedo” was an inside tip, adding, “If one misses, the other is likely to hit.”
On Thursday, when Smith said Galleon lawyers never asked him about insider trading within the hedge fund, Lynam indicated that he might have evidence that says the opposite.
After the judge excused the jury for the day, prosecutors again complained that Lynam will try to use Galleon’s confidential notes in court.
Lynam has invoked attorney-client privilege to prevent the government from seeing the same documents he uses to attack witness credibility. Prosecutors say Lynam can’t use privilege as both “sword” and “shield.”
But U.S. District Judge Holwell confirmed that such privilege is still intact.
After Smith’s testimony, the government called Laura Durr, a senior financial executive in Polycom, a voice-and-video technology company. She testified that her company reported “record revenue” on Jan. 25, 2006. Prosecutors believe that Sunil Bhalla, who worked for the company, leaked information about this report to Roomy Khan, a key cooperating witness against Rajaratnam.
Witness testimony continues on Monday.