Rajaratnam Prosecutors Show How He Tapped Inside Sources

Galleon Group co-Founder Raj Rajaratnam
Raj Rajaratnam, Galleon Group co-founder. Photographer: Jin Lee/Bloomberg

Prosecutors in Raj Rajaratnam’s criminal trial called a witness to help show how the Galleon Group LLC co-founder allegedly used information from an inside source to get advance notice of the sale of PeopleSupport Inc.

Lance Rosenzweig, a founder and ex-chairman of PeopleSupport, testified today in Manhattan federal court that Galleon, owner of 25.5 percent of the outsourcing company’s shares, placed Krish Panu, a managing partner at the hedge fund, on the PeopleSupport board in April 2008.

Prosecutors played wiretaps of Panu giving Rajaratnam confidential information about PeopleSupport and of Rajaratnam passing tips about the company to his friend Rajiv Goel. In one recording, Rajaratnam tells Goel about an offer for PeopleSupport by Essar Group, an Indian company controlled by billionaire brothers Shashi and Ravi Ruia.

“So the Ruias made a firm bid now,” Rajaratnam told Goel in a July 30, 2008, phone call, days before the Aug. 4 public announcement of the deal. “In the amount, 12.25.”

“Oh wonderful, wonderful thanks,” Goel replied.

News of the agreement by Essar Group’s Aegis BPO unit to pay $12.25 a share for PeopleSupport, or 29 percent more than the previous closing price, sent the company’s stock up 25 percent.

Rajaratnam, 53, is on trial 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 and hedge fund traders. He says his trades were based on legitimate research and denies wrongdoing. Panu didn’t immediately return a phone message left at his home today.

Closing Date

In October 2008, when Essar asked to extend the closing date because of liquidity problems in the world financial markets, PeopleSupport’s stock price “dropped precipitously,” Rosenzweig, testified.

On Oct. 7, 2008, while PeopleSupport and Essar negotiated a closing date, Rajaratnam and Goel spoke again. Rajaratnam said he bought 30,000 shares of PeopleSupport for Goel’s personal brokerage account, saying “I’m 100 percent sure.”

“We know because one of our guys is on the board,” Rajaratnam said on the wiretap. “I can’t buy any more because I own 25 percent of the company. They have a poison pill, right?”

The next day, when PeopleSupport announced the acquisition would close Oct. 31, 2008, the shares rose 23 percent.

Earlier the government played a wiretapped recording of Panu briefing Rajaratnam about the company’s performance and about Rosenzweig’s secret trip to India to meet potential suitors.

‘The Good News’

“The good news, Raj, is they’re going to generate free cash flow 30 million this year,” Panu said in a May 2, 2008, conversation that the government secretly recorded off of Rajaratnam’s mobile phone.

Assistant U.S. Attorney Reed Brodsky asked Rosenzweig whether news of his trip to India was public.

“No, it was not,” Rosenzweig testified.

On cross-examination, Rosenzweig told defense attorney Terence Lynam that he didn’t know anything about Rajaratnam’s trading in PeopleSupport shares. Lynam questioned whether Rajaratnam’s Oct. 7, 2008, call contained inside information.

“Everything was still in flux, is that correct?” Lynam asked, referring to the time of the call, at 1:46 p.m.

“Yes,” Rosenzweig answered.

Three Witnesses

Rosenzweig was the fourth witness summoned by prosecutors to show how Rajaratnam got inside tips. This morning, Alex Lenke, formerly an investor-relations official at Intel Corp., concluded testifying that Goel, then a treasury executive at the chipmaker, asked him about the company’s performance in early 2007.

Goel has pleaded guilty in the case and is expected to testify that he disclosed tips about Intel’s performance. Brodsky has placed photographs of Goel and Panu on a bulletin board beside the jury box.

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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