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Witness Relates Inside Trading’s Mental Toll

MANHATTAN (CN) - A key government witness on Tuesday described the "sinking feeling" he experienced when confidential information that he leaked to his former boss at the Galleon hedge fund, Raj Rajaratnam, eventually became public.

"I remember after the announcement I had a sinking feeling in my stomach," said Adam Smith, a former Galleon analyst and trader, regarding the merger of Integrated Circuit Systems and Integrated Device Technology. Smith is one of the more than 15 alleged associates and tipsters who have pleaded guilty to what prosecutors call the largest insider trading scheme in history, allegedly spearheaded by Rajaratnam.

Having just won permission from U.S. District Judge Richard Holwell earlier that morning, Rajaratnam's defense attorneys will likely try to sink Smith's credibility by bringing up allegedly inconsistent statements he gave to the FBI.

After Smith pleaded guilty to securities fraud and conspiracy, the FBI asked him to record his Galleon co-worker, Ian Horowitz, about the scheme.

Though Smith and Horowitz agreed, on tape, that Galleon had used legal information as a basis for its trading on one acquisition, Smith told a different story to the FBI months earlier, Rajaratnam's attorneys say.

Before the jury entered on Tuesday, prosecutors told Judge Holwell that Smith was lying on that tape to gain Horowitz's confidence, at the FBI's request and direction.

Assistant U.S. Attorney Reed Brodsky said that Smith could not have given inconsistent statements to the FBI "by definition" because "the statements he made were part of the script and direction of the FBI."

Nevertheless, Holwell said Rajaratnam's attorneys could question Smith about the alleged inconsistency. He also barred the government from alluding to an alleged cover-up of the conspiracy by Rajaratnam's brother.

On the morning of Rajaratnam's arrest, Smith saw Rengan Rajaratnam carting away notebooks from the Galleon executive's office, court documents show.

Holwell agreed with defense attorney Terence Lynam's argument that this evidence constitutes hearsay because it implies without evidence that Rengan acted at his brother's direction, and Raj has not been charged with obstruction.

Smith took the witness stand shortly after Holwell made his rulings.

Anticipating cross-examination questioning, Assistant U.S. Attorney Andrew Michaelson asked Smith early about how the FBI coached him before he recorded calls.

"They told me not to tell the truth all the time during those calls," Smith said.

Direct examination later turned to Smith's involvement in the conspiracy before his cooperation with the government.

Smith said that Rajaratnam asked him to hire Mike Tomlinson, an Intel executive, as a "consultant" to provide him with privileged information about the computer company's quarterly revenue and gross margins. (A prior witness, former McKinsey executive Anil Kumar, also said that Rajaratnam hired him as an independent consultant.)

Smith said he also got tips from Morgan Stanley banker Kamal Ahmed, whom Smith said was his tipper on the Integrated Circuit Systems and Integrated Device Technology merger. 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.

"We did not want to have a record in our computer system of any information that was nonpublic," Smith said.

On March 17, 2005, Smith told Rajaratnam that the merger was on track by sending an e-mail with the subject "Eyes" and the body text "Game on," evidence showed.

That afternoon, Smith said that Raj told him to create an "e-mail trail" to make it appear that Galleon was trading on graphics chip maker ATI Technologies based on legitimate market research, rather than a tip that it would be acquired by Advanced Micro Devices.

A wiretap shows Rajaratnam alluding to such an "e-mail trail" in a phone call with Krish Panu and Kris Chellam, both of whom he made heads of funds owned by Galleon.

At one point during direct examination, Smith echoed a metaphor prosecutors used in opening statements, saying that Galleon executives did their "homework" but also "cheated."

Smith said that his research led him to believe that ATI was a valuable stock, but that inside information gave him "two torpedoes in the water."

"If one misses, the other is likely to hit," Smith explained.

Joe Liu, a Galleon employee based in Taiwan, provided tips about the company Synaptics, which manufactures touch pads for notebook computers, Smith said.

In one wiretap, Rajaratnam can be heard telling Liu, "I just wanted to know if you got any updates on Synaptics because it's a large position for us."

Smith also testified that Rajaratnam had contacts for inside deals involving other technology companies such as Spansion, Vishay and Xilinx.

Defense attorneys have argued throughout the trial that Rajaratnam traded based on analyst reports, market research and news reports.

Smith undercut that defense by testifying that Galleon employees had little time to read the various analysts' reports that they received. He added that he read less than one-fifth of the reports in his e-mails box.

Smith's direct examination continues on Wednesday.

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