Wiretap May Turn the Tables for Galleon Exec

MANHATTAN (CN) - Defense attorney Terence Lynam used an FBI wiretap to try to discredit the testimony of a key government witness against his client, Raj Rajaratnam, who is charged with operating the largest insider trading scheme in history.

Before trial, defense attorneys unsuccessfully fought to bar the admission of dozens of tapes and transcripts, in which their client allegedly receives and communicates illegal tips about mergers, acquisitions and quarterly statements of major technology companies.

In an ironic turn, prosecutors failed to block Rajaratnam's introduction of one of those tapes, which he says captures a government witness in a sting operation that backfired.

Defense attorneys for Rajaratnam, the billionaire who co-founded the Galleon hedge fund, got the green light from U.S. District Judge Richard Holwell on Tuesday to play the tape.

Former Galleon trader Adam Smith made the secret recording for the government. It reveals the cooperating witness trying to ensnare his former friend and co-worker Ian Horowitz into admitting that Galleon used inside information about Cisco's acquisition of Starent Networks to play the stock market.

Smith said he interrupted Horowitz's vacation by calling him three times on Jan. 14, 2011, to try to capture incriminating statements for the FBI. Instead, he would up recording himself agreeing with Horowitz that the Starent trade was based on meticulous and legal research.

Referring to the acquisition, Horowitz is recorded as saying: "We were never in it for that reason." Smith replied in kind: "Right. I mean those were all legitimate resources."

On the witness stand Tuesday, Smith said the FBI told him to lie to win Horowitz's confidence.

After playing a heavily redacted portion of the tape for the court on Wednesday, defense attorney Lynam called the exchange a strange way to coax an admission of insider trading.

A more complete transcript, found in court documents, shows that Horowitz was suspicious that Smith was taping him.

According to that document, Horowitz said: "Like, I feel like that you're ... the questions you are asking me are like you are tapping me on the phone trying to get me to say some things."

Smith replied, "Are you serious? Dude, come on... I'm telling you 100 percent that's not the case."

When Lynam accused him of betraying his friend, Smith replied: "It was an impossible situation for me. ... Anything I chose would be a bad outcome."

Smith agreed that he used to think Galleon had been a good employer to him. In the profile Smith submitted for his 10-year reunion at Harvard University in 2004, he wrote: "It's the first job I've truly loved, and I find the challenge of the stock market exhilarating."

Lynam said that Smith, who has pleaded guilty to securities fraud and conspiracy, was trying to "turn on" Horowitz and Rajaratnam to avoid further prosecution for other charges, like obstruction.

During direct examination, Smith said he trashed an incriminating fax that Galleon had received from an employee based in Taiwan. He said Rajaratnam put the document on his desk, saying, "I hope you can take care of this."

Once Rajaratnam was arrested, Smith said that he voluntarily threw out his own notebook and laptop computer, and then told Galleon that he lost them.

Lynam said that Smith traded his cooperation for the government's promise not to bring obstruction charges against him. The government told Smith that failure to cooperate would mean not seeing his two sons until they were in their 20s, Lynam said.

Smith acknowledged that he felt "pressure" to cooperate, but says he was never promised a more lenient sentence in return.

As he had with earlier witnesses, Lynam pressed Smith to agree that Rajartnam used research, not tips, to trade on Goldman Sachs, ATI Technology, Intel and other major stocks.

Lynam said that Galleon voluntarily registered with the Securities and Exchange Commission in 2005, a decision that obligated the hedge fund to retain all online communications. Now the government is using those e-mail and instant messages against Rajaratnam at trial.

Prosecutors have brandished one of those instant messages, between Smith and his Taiwan-based co-worker Joe Liu, to show the lengths to which Galleon employees went to hide incriminating conversations. But other IMs show that the mostly careful employees still slipped sometimes.

Lynam suggested that Smith misrepresented one such IM exchange, in which Liu talked about sending Rajaratnam a fax.

Smith testified that they used faxes to avoid an online record of the information. But Lynam said that the fax to which Liu referred represented the man's request to become a portfolio manager, a position he eventually attained.

Smith acknowledged that Liu was seeking that position in the same timeframe but said he could not recall if it was the subject of the fax in question.

Lynam also suggest that Smith told Galleon's attorneys different information than he gave the FBI.

Smith denied the allegations and said he could not remember every question Rajaratnam's attorneys asked in June 2010.

When the jury left the room, Assistant U.S. Attorney Jonathan Streeter told Judge Holwell that Rajaratnam was trying to use privileged communications between attorneys and clients as both a "sword" and a "shield," invoking the privilege to prevent the government from seeing the notes while using the communications to attack its witness.

Judge Holwell will decide whether Galleon attorneys' claims to attorney-client privilege should be waived before cross-examination continues on Thursday morning.

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