Rajaratnam's Family Invested in Defense Witness’s Fund Weeks Before Trial
Former Galleon Chief of Research Richard Schutte
Louis Lanzano/Bloomberg
Richard Schutte, former president and chief of research at Galleon Group LLC, arrives at federal court in New York on April 12, 2011.
Richard Schutte, former president and chief of research at Galleon Group LLC, arrives at federal court in New York on April 12, 2011. Photographer: Louis Lanzano/Bloomberg
April 15 (Bloomberg) -- Douglas Burns, a former federal prosecutor, talks about the defense in the insider-trading trial of Galleon Group co-founder Raj Rajaratnam. Galleon’s former U.S. president, Richard Schutte, testified yesterday that Rajaratnam’s family invested $15 million in his Spottail Capital Advisers LLC fund weeks before he took the stand to defend Rajaratnam. That followed a $10 million investment that Rajaratnam himself made in September 2010. Burns speaks with Deirdre Bolton on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
Galleon Group LLC co-founder Raj Rajaratnam’s family invested $15 million in a fund run by Richard Schutte weeks before he took the stand to defend Rajaratnam at a federal insider-trading trial.
That came on top of a $10 million investment that Rajaratnam himself made in September 2010 in the $35 million fund, Spottail Capital Advisers LLC, Schutte told a jury yesterday in Manhattan federal court.
The testimony from Schutte, Galleon’s former U.S. president, came at the close of his cross-examination by Assistant U.S. Attorney Reed Brodsky. Schutte, one of Rajaratnam’s four witnesses so far, testified for four days in defense of his former boss.
“So eight weeks before the start of the trial, Mr. Rajaratnam’s family put $15 million into Spottail?” Brodsky asked.
“That is correct,” Schutte replied.
Rajaratnam, 53, has been on trial since March 8 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.
Rajaratnam’s defense began on April 11. Under friendly questioning by defense lawyers, Schutte reviewed scores of analyst reports, news accounts and other documents that the defense says are the basis of Rajaratnam’s trades in Intel Corp. (INTC), Google Inc., Goldman Sachs Group Inc. (GS) and other companies.
Cross-Examination
On cross-examination of Schutte, which began April 13, Brodsky sought to undermine his testimony by showing that Rajaratnam didn’t see the research reports, that they contained contradictory recommendations, and that Rajaratnam’s trades coincided with his receipt of what the U.S. says is inside information.
Brodsky then concluded his questioning by asking Schutte about Spottail, which Schutte formed on July 1, 2010, at the same time that Schutte was closing Galleon under a $2 million consulting contract with the firm.
Is one of the investors Raj Rajaratnam? Brodsky asked.
Schutte, Spottail’s managing member, said yes.
“He is the biggest investor?” Brodsky asked.
“That is fair to say,” Schutte replied.
Close Associates
The chief operating officer of Spottail is George Lau, another ex-Galleon employee, Schutte testified. Asked about the compensation paid to Spottail, Schutte said his firm received 2 percent of the capital under management and 20 percent of the profits -- a standard arrangement in the hedge fund industry, he added.
Brodsky asked whether 2 percent of Rajaratnam’s $25 million investment amounted to $500,000.
“That is correct,” Schutte said.
Schutte also acknowledged that he and Rajaratnam spoke with one another for 15 minutes on March 18, 10 days after the trial began. The former Galleon president said the two spoke sporadically.
Expert Witness
“We were close business associates,” said Schutte, who this year signed a new consulting agreement with Galleon that pays him as much as $4,000 a month to shut the firm. “I don’t socialize with him. I don’t golf with him.”
On redirect examination, defense attorney Michael Starr immediately asked Schutte whether Rajaratnam had promised to invest more in Spottail after the trial and whether Rajaratnam had “offered you anything in exchange for testifying for him.”
“Absolutely not,” Schutte said.
Jim McCarthy, a spokesman for Rajaratnam, said after court that the defense was “aware” of the investment, which it deems “routine and ordinary.”
Schutte’s attorney, Alan Vickery of Boies, Schiller & Flexner LLP, said after court “the government apparently felt it had to resort to innuendo to try to blunt the effect” of Schutte’s testimony.
“Mr. Rajaratnam would pay similar fees if he were to invest in another fund,” Vickery said in an e-mailed statement. “During this initial phase of Spottail’s business, Mr. Schutte is not drawing a salary. Further, Mr. Rajaratnam had a comparable amount of money invested in Mr. Schutte’s portfolios at Galleon.”
Former SEC Economist
Schutte was followed to the witness stand by Gregg Jarrell, the top economist for the U.S. Securities and Exchange Commission from 1984 to 1987. Jarrell, testifying as an expert witness for Rajaratnam, has said that tips Rajaratnam allegedly received weren’t material to Galleon or didn’t comprise inside information.
Jarrell testified that he analyzed all 36,437 trades that Rajaratnam made from 2005 to 2009 totaling more than $172 billion. He compared that number to the 126 trades in which the U.S. has alleged insider trading.
“That’s less than one-third of one percent,” said Jarrell, who teaches at the University of Rochester’s graduate school of business in New York.
Jarrell calculated that Rajaratnam actually lost $3.8 million on his allegedly illegal trades -- rather than the $63.8 million the U.S. said he earned -- because Rajaratnam lost $67.6 million in a trade in Advanced Micro Devices Inc. (AMD)
Summations in the case may begin 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).
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: Michael Hytha at mhytha@bloomberg.net
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