Richard “Rick” Schutte, the ex- president of hedge-fund company Galleon Group LLC, sparred with a prosecutor at the insider-trading trial of Raj Rajaratnam over the nature of competition, pressure and investor expectations.
After testifying for two days in Manhattan federal court on behalf of Rajaratnam, Schutte, once Galleon’s head of research, began fielding questions yesterday from Assistant U.S. Attorney Reed Brodsky, who asked him whether the hedge-fund industry is competitive.
“I’m not going to say whether it’s highly or lowly” competitive, Schutte answered. He was also noncommittal when Brodsky asked about the pressure to perform well at Galleon.
“It’s the same as every other industry,” Schutte said. “I don’t know what you mean by pressure.”
Asked if Galleon investors would be content with an annual profit of 20 percent, a combative Schutte said, “I can’t speak to what investors would be happy with.”
Rajaratnam, 53, is the central figure in the largest crackdown on hedge-fund insider trading in U.S. history. The Sri Lankan-born money manager and co-founder of Galleon is accused of gaining $63.8 million from tips leaked by corporate insiders and hedge-fund traders. He denies wrongdoing, saying he based his trades on research.
The cross-examination followed two days of questioning by defense lawyer Michael Starr, who had Schutte review analyst reports, news accounts, internal firm e-mails and other documents designed to show that Rajaratnam’s trades were based on Galleon research, not inside information.
During about 10 hours of direct testimony, Schutte sought to support the defense case that the trades by his ex-boss were lawful. Prosecutors had claimed, for example, that Rajaratnam possessed inside information that Cisco Systems Inc. (CSCO) would acquire Starent Networks Corp.
Starr questioned Schutte about a dozen different analyst reports from inside and outside of Galleon, many recommending that the firm buy shares in Tewksbury, Massachusetts-based Starent, which Rajaratnam did in 2009.
“Stock will pop,” Galleon’s Rengan Rajaratnam -- an analyst and the defendant’s brother -- wrote in an e-mail that year.
Schutte attempted to rebut accusations that Krish Panu, the chief executive officer of @Road Inc., tipped Rajaratnam to information that the company would be acquired by Trimble Navigation Ltd. (TRMB) in December 2006. He said Rajaratnam had selected @Road in March 2006 in Galleon’s internal “Best Stock Idea” contest.
“His pick was a long,” Schutte testified, meaning that Rajaratnam anticipated the shares would rise.
Schutte’s direct testimony contained no accounts of government wiretaps, secret offshore payments or “e-mail trails” to hide insider trading, as prosecution witnesses had described earlier in the trial. Rather, he told jurors about price targets, corporate earnings releases and investment bank ratings changes.
The tenor of the testimony changed when Brodsky began his cross-examination. The prosecutor asked Schutte whether Galleon investors wanted the firm to “cheat.”
“I don’t know what investors want,” Schutte replied. “But that’s not a business plan I would put forth.”
As the cross-examination continued, Schutte grew more responsive to Brodsky’s questions. He acknowledged that press reports, which the defense suggested were a basis for some of Rajaratnam’s trading, may not have been seen at Galleon.
He also said that some outside analyst reports that the defense had introduced into evidence may have contained unreliable or contrary conclusions.
“We reviewed thousands and thousands of reports,” Schutte said.
On April 12, the defense suggested on Schutte’s direct examination that Rajaratnam bought shares in Goldman Sachs Group Inc. (GS) in September 2008 because a Galleon consultant predicted that Congress would inject billions of dollars into U.S. banks, and not because he was tipped that Berkshire Hathaway Inc. would invest $5 billion in the bank. Brodsky had Schutte testify that Rajaratnam didn’t buy shares directly in other banks when he purchased Goldman stock.
The prosecutor asked Schutte about a meeting he and Rajaratnam had on July 31, 2008, with Goldman Sachs President Gary Cohn.
“You wouldn’t ask Mr. Gary Cohn for confidential information that was discussed at a Goldman Sachs board meeting?” Brodsky asked. Jurors earlier in the trial heard testimony that Rajaratnam solicited such tips from a Goldman Sachs board member.
“I think that’s a fair statement, yes,” Schutte said.
“Waiting for Superman”
The defense was permitted to interrupt the cross- examination to summon as a character witness Geoffrey Canada, creator of the Harlem Children’s Zone, a New York nonprofit group focused on education. Canada, who was featured last year in the documentary “Waiting for Superman,” said he met Rajaratnam in the early 2000’s as he was soliciting donations.
“Raj and I hit it off right away,” Canada said, calling Rajaratnam generous. “He has a genuine concern for children.”
Canada said he agreed to guarantee Rajaratnam’s $100 million bond on the day of his friend’s arrest on Oct. 16, 2009.
“I would also like to say that I personally don’t have the $100 million to guarantee,” Canada said to laughter in the courtroom.
Schutte’s cross-examination will continue today. Summations in the case are expected next week, the judge said.
The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).
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