Galleon’s Rajaratnam Talked on Tape About Goldman Board Source

Raj Rajaratnam, Galleon Group LLC’s co-founder, told a colleague he had been tipped by a source on the Goldman Sachs Group Inc. (GS) board and would trade on the leak about unanticipated losses, according to a wiretapped recording.

“I heard yesterday from somebody who is on the board of Goldman Sachs that they are going to lose $2 per share,” Rajaratnam told Galleon’s David Lau on an Oct. 24, 2008, recording played for jurors yesterday at Rajaratnam’s insider trading trial. The day before, Goldman Sachs Chief Executive Officer Lloyd Blankfein had briefed board members on the losses.

“He was telling me that the quarter is really bad,” Rajaratnam told Lau, who worked in Galleon’s Singapore office.

“The street has them making $2.50,” Rajaratnam continued. “I’m gonna whack it, you know.”

Rajaratnam is on trial for trading on illegal tips from sources including Rajat Gupta, a onetime Goldman Sachs director. Prosecutors previously played a tape of Gupta telling Rajaratnam about other board talks, and phone records show a call to Rajaratnam from Gupta’s phone 23 seconds after Blankfein briefed the board on firm losses in October 2008.

Prosecutors say Galleon saved more than $3 million by trading on Gupta’s tip about New York-based Goldman Sachs. Gupta, who denies wrongdoing, faces an administrative action by the Securities and Exchange Commission for leaking board news. He has not been criminally charged.

Photographer: Louis Lanzano/Bloomberg

Raj Rajaratnam, the Galleon Group co-founder accused of insider trading. Close

Raj Rajaratnam, the Galleon Group co-founder accused of insider trading.

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Photographer: Louis Lanzano/Bloomberg

Raj Rajaratnam, the Galleon Group co-founder accused of insider trading.

Second Tape

Jurors yesterday heard another Rajaratnam tape that the government secretly recorded on Sept. 24, 2008. Rajaratnam can be heard telling a colleague that he had exploited news the day before that Warren Buffett’s Berkshire Hathaway Inc. would invest $5 billion in Goldman Sachs. Prosecutors say the tip also came from Gupta.

“I got a call at 3:58,” Rajaratnam is heard on the recording telling his personal trader, Ian Horowitz, “saying something good may happen to Goldman.”

Rajaratnam told Horowitz that a junior Galleon trader wasn’t available to buy shares. “So I went to Gary and say, just buy me some,” according to the recording. The reference is to Galleon chief trader and co-founder Gary Rosenbach.

The U.S. says records show Rajaratnam bought $43 million worth of Goldman stock and made $1 million in the trade.

Smith also testified that during the time period of September 2008, he saw Gupta making “biweekly” visits to Rajaratnam’s office. The U.S. also showed the jury Galleon records showing that Gupta had invested $16.4 million in Rajaratnam’s Voyager Capital Partners Ltd. fund as late as June 2008.

Published Sources

Rajaratnam has been on trial for three weeks in the largest crackdown on hedge-fund insider trading in U.S. history. The Sri Lankan-born money manager is accused of making $45 million from tips leaked by corporate insiders. Rajaratnam denies wrongdoing, saying he based trades on research and published sources.

The tapes of the two Galleon calls came in the final minutes of the testimony of former Galleon trader Adam Smith, who has pleaded guilty and is testifying for prosecutors in exchange for leniency. Smith explained references in the recordings, including who “Gary” was.

Earlier, Smith outlined several ways in which, he said, Galleon concealed trades made with inside information. One strategy was to sell small quantities of stock that the firm expected to rise in coming days, he said.

Smith, 39, testified that soon after he joined Galleon in 2002 as an analyst, Rajaratnam took him aside and explained how the trades worked. If Galleon owned 100,000 shares of a stock expected to rise in two days, traders would sell 25,000 shares that afternoon, buy 50,000 shares the next morning and sell 25,000 later the same day, he said.

‘E-Mail Trails’

“The idea was to put into a record, or show a pattern, of buying and selling -- selling being inconsistent” with insider trading, Smith said. “We could say we made sales beforehand.”

Other gambits included creating phony “e-mail trails” that justify transactions, manufacturing unneeded research, avoiding unusual trading patterns, especially in options, and communicating with overseas analysts by fax instead of e-mail, which was stored on computers, he said.

Smith admitted to discarding a notebook and his personal laptop computer the day his boss was arrested in October 2009. A week later, when Rajaratnam asked him to “take care of” a fax with “sensitive information” that came from Galleon analyst in Taiwan, Smith said he threw that away, too.

‘The Big Fish’

Defense attorney Terence Lynam began cross-examining Smith, yesterday, asking if was testifying against Rajaratnam to “save himself” and give the government “the big fish” they sought by convicting Rajaratnam.

Smith said that in 2010, after leaving Galleon, the U.S. had wiretapped him committing insider trading while managing a hedge fund called Polaris Investment Partners Inc.

He said he agreed to cooperate with the government after they played him wiretaps from 2008 and 2010 in which he was caught committing insider trading. He also said authorities told him he could face as long as 25 years in prison if he went to trial and was convicted.

“Don’t you want to avoid a long prison sentence, and the best way is to testify in this case today?” Lynam asked.

“The reason I’m here is because I signed the plea agreement and agreed to testify truthfully,” Smith said.

‘All Legitimate’

Rajaratnam’s lawyers played for the jury a secretly recorded Jan. 14 audiotape Smith made for the FBI with Horowitz. During the call, Smith asked Horowitz if he was aware of inside information in Galleon trades.

“You didn’t, I didn’t, right?” Smith asked.

“It wasn’t like we knew anything,” Horowitz replied.

“Those were all legitimate,” Smith adds later in the conversation.

U.S. District Judge Richard Holwell, who is presiding over the case, told jurors the tape was being offered for the jury to assess Smith’s credibility.

Lynam asked Smith about his statement on the tape the Galleon trades were built on legitimate data. Smith said he was instructed by the FBI to lie to Horowitz in an effort to get him to implicate himself.

“You want the jury to believe you’re lying then, but telling the truth now?” Lynam asked.

“The reason is, that if I lie from this day forward, I face the maximum sentence,” he said. “And if I tell the truth and nothing but the truth, then I have a chance.”

Lynam asked Smith if Galleon analysts found the easiest way to communicate was to send a fax, countering his earlier testimony that the use of faxes was suspicious.

“No, the easiest way to communicate was not a fax,” Smith said. “My BlackBerry worked anywhere I traveled, China, Korea, Europe, Taiwan.”

Lynam reviewed trading records, e-mails and analyst reports to show that Galleon had lawful reasons to trade in stocks at issue. In one, a Galleon analyst wrote that Integrated Circuit Systems Inc. was “shopping itself around,” months before the company was acquired. Prosecutors say Rajaratnam bought the stock based on inside information.

The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: David Glovin in Manhattan federal court at glovin@bloomberg.net; Patricia Hurtado in Manhattan federal court at phurtado@bloomberg.net; Bob Van Voris in Manhattan federal court at rvanvoris@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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