Before asking ex-Galleon Group LLC U.S. President Richard Schutte about $25 million in investments he received from Raj Rajaratnam and his family, prosecutors sought to make sure defense lawyers didn’t prepare Schutte for the question.
“He is on cross-examination,” Assistant U.S. Attorney Reed Brodsky told the judge in a sidebar conference in Rajaratnam’s insider-trading trial before the court broke for lunch on April 14. Defense lawyers “should not have the opportunity to go talk to his lawyers who are here in the courtroom and who are working closely with him and prepping for this.”
When the trial resumed, Brodsky peppered Schutte with questions about whether Rajaratnam, Galleon’s co-founder, had invested in Schutte’s fund, SpotTail Capital Advisers LLC, seeking to show that the key defense witness was biased. Schutte confirmed that Rajaratnam had made the investments.
The confrontation may lead jurors to disregard much of Schutte’s previous testimony if they conclude that defense lawyers were “hiding something” by not earlier explaining Rajaratnam’s investment in SpotTail, said Anthony Barkow, a former prosecutor in Manhattan who runs a center on criminal law at New York University.
“It’s likely that the defense is going to attack the credibility of the government’s witnesses and maybe even the prosecutors,” Barkow said in a telephone interview. “But when you squander your own credibility like this, it’s hard to attack someone else.”
Rajaratnam, 53, has been on trial since March 8 in federal court in Manhattan 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.
Much of Rajaratnam’s defense, which began on April 11, has centered around the testimony of Schutte, who worked at Galleon from 2004 until last year and remains a consultant to the hedge fund. 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. (GOOG), Goldman Sachs Group Inc. (GS) and other companies.
Schutte’s testimony ended April 14.
On cross-examination of Schutte, 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 concluded his questioning by asking Schutte about SpotTail, which Schutte formed last year and now manages $35 million. Schutte said Rajaratnam’s family invested $15 million in SpotTail in January and Rajaratnam put in $10 million in September.
The evidence about SpotTail may make it appear as if Schutte’s testimony was “bought,” Stuart Slotnick, a criminal defense lawyer with Buchanan Ingersoll & Rooney PC in New York, said in a phone interview. At the same time, he said, “the jury may say that ‘this is the way the industry works, and I like him.’ Many of the government’s witnesses were people who pled guilty to crime.”
‘Routine and Ordinary’
After court on April 14, Jim McCarthy, a spokesman for Rajaratnam, said the defense was “well aware” of Rajaratnam’s investment in SpotTail, which it deemed “routine and ordinary.” McCarthy yesterday reiterated that the defense was “perfectly aware of these routine business arrangements.”
Defense lawyers had urged the judge not to allow jurors to hear evidence of the investment, according to a transcript of a “sidebar” conference outside of the jury’s presence.
“We object to this as being both irrelevant and far more prejudicial than probative and being likely to confuse and mislead the jury,” defense attorney Michael Starr told U.S. District Judge Richard Holwell. Another defense lawyer, Terence Lynam, asked whether the government may “introduce the actual amounts” of Rajaratnam’s investment.
After Holwell said the evidence of Rajaratnam’s SpotTail investment showed Schutte’s “potential bias” and allowed it to come before jurors, prosecutors sought to ensure that the defense didn’t “talk to Mr. Schutte about it” during the hour- long lunch break.
“We didn’t talk to people’s lawyers and coach them through their lawyers on cross-examination,” Brodsky said. “They shouldn’t either.”
Lawyers are typically barred from talking with their witnesses during the adversary’s cross-examination.
The transcript doesn’t make clear when prosecutors or the defense learned of Rajaratnam’s investment in SpotTail. Alison Preece, a spokeswoman for Schutte’s attorney, Alan Vickery, didn’t have an immediate comment. Vickery said April 14 prosecutors “had to resort to innuendo to try to blunt the effect” of Schutte’s testimony.
On April 12, the second day of Schutte’s direct testimony for Rajaratnam, Starr asked the judge to order prosecutors to provide a preview of their anticipated cross-examination.
“I don’t think that I should tell the defense so that, then, they ask all the questions I’m going to ask,” Brodsky replied, according to a transcript of a sidebar conference that day. “I think I have some very important questions that go to the issue of credibility of the witness.”
Brodsky offered to make a confidential showing to Holwell of the facts he had gathered. The judge said the two sides would discuss it later, which they did on April 14.
Brodsky told Holwell April 14 that prosecutors intend to present a rebuttal case while not identifying who it will be.
On April 12, prosecutors told the judge they were prepared to summon Goldman Sachs President Gary Cohn to rebut the defense if Schutte was permitted to tell jurors about comments Cohn made at a meeting with Rajaratnam on July 31, 2008.
“That’s hearsay” and shouldn’t be allowed as evidence, Brodsky told the judge, according to a transcript of a sidebar conference. If the defense witness testified about Cohn’s comments, Brodsky said, “We are prepared to call Mr. Cohn, and we would be allowed to do that as part of our rebuttal case.”
Schutte testified that on July 31, 2008, he and Rajaratnam met with Goldman Sachs executives and discussed the “potential” that the New York-based investment bank would “combine with an entity that had a large deposit base,” including a commercial bank or insurance company.
The defense offered Schutte’s testimony to respond to the government’s claim that Rajat Gupta, then a Goldman Sachs board member, tipped Rajaratnam two days before that meeting that the bank was considering buying American International Group Inc. (AIG) or Wachovia Corp. Through Schutte’s testimony, the defense may have been trying to show that the alleged tip from Gupta didn’t involve confidential information.
In the end, Schutte didn’t testify about Cohn’s comments at the July 2008 meeting. Under cross-examination by Brodsky, Schutte said he didn’t ask Cohn at the meeting whether Goldman Sachs was planning to buy a bank imminently and that Cohn didn’t address the issue.
Lucas van Praag, a Goldman Sachs spokesman, declined to comment. Ellen Davis, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan, also declined to comment.
Summations in the case may begin next week. Now testifying as an expert witness for the defense is Gregg Jarrell, the top economist for the U.S. Securities and Exchange Commission from 1984 to 1987.
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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