Adam Smith, a former Galleon Group LLC analyst and portfolio manager, testified that the firm used insider tips as an “edge” in a strategy to make money when company revenue figures differed from the Wall Street consensus.
Smith, 39, told jurors in the criminal trial of Raj Rajaratnam today that part of his job was “getting the number” -- learning revenue figures before they became public -- from insiders at publicly traded companies including Intel Corp. (INTC), the world’s largest semiconductor maker, and Intersil Corp. (ISIL)
“Research is sort of doing your homework ahead of time,” Smith told jurors. “Getting the number is more like cheating on the test.”
Smith has pleaded guilty to two criminal counts and is cooperating with prosecutors. Today he told federal court jurors in Manhattan that he continued trading on inside information after leaving Galleon, including after the October 2009 arrest of Rajaratnam.
Rajaratnam, 53, the billionaire co-founder of Galleon, is the central figure in the biggest insider trading investigation targeting hedge funds. He denies wrongdoing and claims he based his trading on legitimate research.
Smith, who started working for Galleon as an analyst in 2002, told jurors how the firm signed a consulting agreement with one of his contacts, Michael Tomlinson, who worked in the Intel department that makes capital investments.
Tomlinson’s brother, who also worked for the Santa Clara, California-based company, could get him secret financial data, Smith said. Tomlinson was to be paid to deliver tips on the company’s revenue and growth figures, Smith testified.
“I proposed that we strike the deal,” Smith said. Rajaratnam agreed, Smith told jurors.
In a March 2005 e-mail shown to jurors, Smith told Rajaratnam that Tomlinson was “having trouble quantifying the outlook” for the quarter because his brother had been reassigned.
“They’re trying an alternative, but I got the feeling we’re not going to get a specific number before Thursday,” Smith wrote to Rajaratnam. “This is disappointing. I’ve told him he needs to do better.”
Rajaratnam and Smith abandoned the arrangement with Tomlinson after his information, spanning two financial quarters at Intel, proved inaccurate, Smith said.
Chuck Mulloy, an Intel spokesman, said Tomlinson is no longer an employee of the company and declined to comment further.
Smith testified he was able to get advance revenue figures from Intersil, a semiconductor maker, from a Taipei, Taiwan- based Intersil engineer named Jason Lin. Lin told Smith that he got the information from an unnamed “senior member of the team” in Taiwan, Smith said in court.
Adam Latham, a spokesman for Milpitas, California-based Intersil, didn’t immediately return a call seeking comment.
Smith earned a bachelor’s degree at Harvard University and an MBA from Harvard Business School. He told jurors he telephoned others at the request of FBI agents to help them gather evidence to use in the investigation. He said he may be sentenced to as long as 25 years in prison and hopes his cooperation will help him get a lighter sentence.
Smith’s testimony was preceded by that of Carolann Shields, an official at McKinsey & Co. Inc. who testified that the firm’s phone records show Rajat Gupta, then the managing partner and a member of the Goldman Sachs Group Inc. (GS) board, telephoned Rajaratnam within seconds of participating in Goldman Sachs board discussions.
Goldman Sachs Chief Executive Officer Lloyd Blankfein testified March 23 that, at those meetings, the board discussed earnings and a $5 billion investment in the firm by Warren Buffett’s Berkshire Hathaway Inc. in 2008.
Separately, prosecutors suffered legal setbacks this morning when the judge barred the government from offering evidence that Rajaratnam’s brother, Rengan Rajaratnam, removed Raj’s notebooks from Galleon offices immediately after his sibling’s arrest.
The judge also said that Smith can’t testify about statements that Rengan Rajaratnam made to him later about taking the notebooks.
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