Former Galleon Group LLC traders Adam Smith and Michael Cardillo pleaded guilty today and agreed to cooperate with prosecutors in insider-trading cases.
The men entered their pleas in federal court in Manhattan today, several hours apart.
Smith, 38, became the seventh person to plead guilty and work with the government to build a case against the hedge fund’s co-founder, Raj Rajaratnam. Rajaratnam’s spokesman, Jim McCarthy, declined to comment today. Rajaratnam denies wrongdoing.
Cardillo, 33, will help in a related case.
In court, Smith said his insider-trading conspiracy with Rajaratnam and others at Galleon ran from 2003 to 2009 and involved several stocks, including a deal by Advanced Micro Devices Inc. to acquire ATI Technologies Inc. He said he shared illegal tips with Rajaratnam, who goes on trial next month.
“I spoke with Raj Rajaratnam over the telephone in New York and communicated nonpublic information about Vishay Intertechnology,” Smith told U.S. District Judge John Koeltl.
Smith, who earned an MBA degree from Harvard Business School in 1999, according to court papers, pleaded guilty to conspiracy and securities fraud. He worked at Galleon from 2002 to 2009. In 2006, he became portfolio manager of the Galleon Emerging Technology Funds, also known as the Galleon Communications Funds, court papers say.
Federal prosecutors said at the hearing that the sources of Smith’s inside information included an “investment banker” and employees of public companies including Intersil Corp., none of whom they identified.
The lawyer for Morgan Stanley Managing Director Kamal Ahmed said on Jan. 23 that his client is cooperating with a bank investigation of allegations of insider trading involving Galleon.
The U.S. Securities and Exchange Commission added detail about the banker in a related lawsuit against Smith. The agency alleged that Smith was tipped in May 2006 by an unidentified banker, whom he had known for “many years,” about confidential negotiations by AMD and ATI.
“Smith caused certain Galleon funds that he managed to trade on the basis of the material nonpublic information he received from the investment bank source,” the SEC said in its complaint. “Upon receipt of the information, Smith substantially increased the size of an existing ATI long position that the Galleon funds he managed had in place.”
The banker was “eager to enhance his professional reputation and goodwill with Galleon,” which could provide the banker with “profitable business,” the SEC alleged.
The case is tied to three overlapping circles of insider trading that have been the subject of a Justice Department probe. Another ring focused partly on former Galleon trader Zvi Goffer, who faces a separate trial on May 9.
The three rings have led to charges against more than 30 people so far and guilty pleas from more than 20.
Goffer is accusing of leading an insider-trading scheme that also allegedly involved traders Craig Drimal; Zvi’s brother, Emanuel Goffer; Michael Kimelman; and Jason Goldfarb, a lawyer. Prosecutors said they got tips from lawyers at the law firm Ropes & Gray LLP. They all deny wrongdoing.
On Jan. 14, Arthur Cutillo, a former Ropes & Gray lawyer, pleaded guilty to disclosing information on transactions the firm was working on.
Other government cooperators in the Rajaratnam case include his former friend Rajiv Goel, ex-McKinsey & Co. director Amil Kumar, former Intel Corp. employee Roomy Khan, and former hedge fund manager Ali Far.
In court, Smith admitted getting tips from an unidentified accomplice about Integrated Device Technology Inc.’s acquisition of Integrated Circuit Systems Inc. in 2005, AMD’s acquisition of ATI in 2006, and a potential takeover of Vishay in 2008. He said he also got leaks about earnings of Intersil and Nvidia Corp.
He said he passed along tips to “Rajaratnam and others at Galleon.”
As part of a plea agreement, the government won’t prosecute Smith for “deleting, discarding or destroying computer records and documents in or about October and November 2009, after the arrest of Raj Rajaratnam,” according to court records.
Smith also agreed to disclose details about a conspiracy that took place in 2010, the details of which aren’t identified in court papers.
The cases are U.S. v. Rajaratnam, 1:09-cr-01184, and U.S. v. Goffer, 1:10-cr-00056, U.S. District Court, Southern District of New York (Manhattan).