MANHATTAN (CN) – A government witness on Thursday explained how a Galleon employee leaked top-secret information about a big acquisition, code-named “Easter,” as part of an inside-trading scheme allegedly hatched by the hedge fund’s billionaire co-founder, Raj Rajaratnam. The government calls it the biggest inside-trading scheme in history, and says it brought Rajaratnam $45 million in illegal profits.
In the fifth day of Rajaratnam’s trial on Thursday, the government questioned Lance Rosenzweig, the former CEO and chairman of the customer-management company PeopleSupport.
Galleon and its various entities owned 25 percent of PeopleSupport, according to a Securities and Exchange Commission filing, and one of the hedge fund’s partners, Krish Panu, was nominated to the firm’s board in February 2008.
Rosenzweig said that a “poison pill” clause deterred Galleon from acquiring any more stock to prevent a hostile takeover of PeopleSupport. He added that Rajaratnam was upset with the clause and wanted it removed.
During cross-examination, defense attorney Terence Lynam asks a series of questions that suggested Galleon wanted more shares because Rajaratnam believed PeopleSupport was making poor business decisions, including what he called an “extraordinarily risky” $80 to $100 million real estate venture in the Philippines.
Rajaratnam wrote Rosensweig a letter to “remind” him that PeopleSupport provides “business outsourcing services, and not a real estate investment vehicle,” evidence showed.
Whatever business disagreements the parties may have had did not excuse Rajaratnam seeking inside information from Panu, U.S. Attorney Reed Brodsky said.
After Panu accepted the position on the PeopleSupport board, Rosenzweig sent him an e-mail in May 2008 that described PeopleSupport’s insider trading policy. The e-mail, as discussed in court, said that “the consequences could be severe” for board members that engaged in the prohibited practice.
Defense attorney Lynam suggested that the various nondisclosure agreements were unclear. But later that afternoon, a witness who drafted the agreement said Panu was a “sophisticated individual” and “understood” the agreements that they reviewed.
That month, a government wiretap captured a phone call in which Rajaratnam asked Panu, “Um, number one, how did your meeting with, uh, PeopleSupport go?”
As Panu replied with the “headlines” of that meeting, he said, “Um, the good news, Raj, is they’re gonna generate free cash flow of 30 million this year.”
In June 2008, Panu sat in on a board meeting in which Rosenzweig announced that Aegis, a large outsourcing group based in India, expressed interest in acquiring PeopleSupport. The deal was discussed on PeopleSupport’s internal documents under the code name “Project Easter,” named after Aegis’ parent company Essar Group.
The minutes of a July 28, 2008, board meeting state that the “Easter” deal would be announced the following Monday.
A phone call placed two days later showed Rajaratnam talking with former Intel executive Rajiv Goel who said that the “deal has been approved.” A PeopleSupport press release announced the acquisition days after this call, evidence showed.
But the global economic crisis that took hold of the United States in fall 2008 thwarted the deal’s closing, Rosenzweig said, adding that the Essar requested an extra two weeks to raise the necessary funds.
Goel, who pleaded guilty to fraud last year, was Rajaratnam’s “close friend,” an FBI special agent testified earlier in the trial.
The government’s direct examination of Rosenzweig resumes this afternoon, and will likely include the playing of another wiretapped phone call introduced into evidence on March 10, the first day of trial.
During that call, recorded on Oct. 7, 2008, Rajaratnam discusses an apparent tip: that $41 million will be put in an escrow account, and a deal would close before Oct. 31, 2008.
“We know because, ah, one of our guys is on the board,” Rajaratnam said.
Rajaratnam goes on to state that he cannot buy any more PeopleSupport stock because he owned more than 25 percent of the company, and another investment would activate the poison pill clause.
“I thought it was an opportunity for me to buy for you,” Rajaratnam tells Goel in the recording.
Trial resumes on Monday with the direct examination of government witness Margaret Holloway, a Moody’s senior analyst.