March 30 (Bloomberg) -- Galleon Group LLC made money when company revenue figures differed from the Wall Street consensus by using insider tips as an “edge,” a former portfolio manager testified at his ex-boss’s trial.
Adam Smith told jurors in the criminal trial of Raj Rajaratnam that part of his job was “getting the number” -- learning revenue figures before they became public -- from insiders at Intel Corp., the world’s largest semiconductor maker, Intersil Corp., Synaptics Inc. and other publicly traded companies.
“Research is sort of doing your homework ahead of time,” Smith said. “Getting the number is more like cheating on the test.”
Smith, 39, has pleaded guilty and is cooperating with prosecutors. Yesterday, he told federal court jurors in Manhattan that he continued trading on inside information after leaving Galleon, and even after the October 2009 arrest of Rajaratnam.
Rajaratnam, 53, the billionaire co-founder of Galleon, is the central figure in the biggest insider-trading investigation targeting hedge funds. He denies wrongdoing and claims he based his trading on legitimate research.
‘Getting an Edge’
Smith was the first witness to take jurors inside Galleon, telling them about the company’s structure, the role of analysts and portfolio managers, and how Galleon operated. He testified about Wall Street lingo and Galleon’s strategy.
“I was tasked with doing research, getting an edge,” Smith testified when asked about leaks from an Intersil insider.
Asked by Assistant U.S. Attorney Andrew Michaelson to explain, Smith said an “edge” might be a trading strategy or source of information that would set him apart from peers.
“Getting an edge is the key component to arbitraging consensus” when hedge funds are “looking for situations” in which a company’s results differ from Wall Street expectations, Smith said. “You need to have an edge.”
Smith, who has a bachelor’s degree from Harvard University and an MBA from Harvard Business School, started working for Galleon as an analyst in 2002 after leaving Morgan Stanley. He was later promoted to portfolio manager.
His first illegal tip came in 2004 from Michael Tomlinson, who worked in the Intel department that makes capital investments, Smith testified.
Smith was introduced to Tomlinson through a so-called expert-networking firm. Smith testified he suggested a secret relationship in which Galleon would pay Tomlinson with funds it had set aside for research.
Tomlinson’s brother, who also worked for the Santa Clara, California-based company, could get secret financial data, Smith said. Tomlinson would deliver tips on the company’s revenue and growth figures, Smith testified.
“I proposed that we strike the deal,” Smith said.
Rajaratnam agreed, Smith said. “I told him exactly what our contact was,” Smith said.
Tomlinson didn’t work out, Smith testified. In a March 2005 e-mail shown to jurors, Smith told Rajaratnam that Tomlinson was “having trouble quantifying the outlook” for the quarter because his brother had been reassigned.
“They’re trying an alternative, but I got the feeling we’re not going to get a specific number before Thursday,” Smith wrote to Rajaratnam. “This is disappointing. I’ve told him he needs to do better.”
Chuck Mulloy, an Intel spokesman, said Tomlinson no longer works at the company and declined to comment further.
Smith got advance revenue figures about Intersil, a semiconductor maker, from a Taipei-based Intersil engineer named Jason Lin, he said. Lin told Smith that he got the data from an unidentified “senior member of the team” in Taiwan, and Smith told his boss about the tips and his source’s identity, he said.
Unlike Tomlinson’s, Lin’s leaks were “accurate,” he said.
Adam Latham, a spokesman for Milpitas, California-based Intersil, didn’t return a call seeking comment yesterday.
Smith said he also got leaks from Kamal Ahmed, a friend who worked as a Morgan Stanley investment banker. Ahmed told Smith in 2005 about the pending merger of Integrated Circuit Systems Inc. and Integrated Device Technology Inc., Smith said. In return, Smith said he tried to send banking business to Ahmed.
“I shared it with Raj,” Smith said. “You can make a lot of money with very little risk.”
Prosecutors showed Smith a copy of e-mails he wrote to Rajaratnam with the subject line “the two eyes,” a reference to the “I” at the start of each company’s ticker symbol. Rajaratnam had told him to “be vague” in e-mails, Smith said.
“Game on,” Smith wrote to Rajaratnam on March 17, 2005, after he allegedly got a tip from Ahmed.
Ahmed’s lawyer, Douglas Tween, said his client, who hasn’t been charged, did “nothing illegal or improper.”
Smith said he messaged only Rajaratnam, who was discreet with tips, and not Galleon colleagues, who would share them with others on Wall Street. After the merger was announced and shares of Integrated Circuit Systems jumped more than 10 percent, Smith said he felt pangs of guilt.
“I remember after the announcement having a sinking feeling in my stomach that this could be a problem,” he testified. “I had a moment of worry.”
Another source of information was Joe Liu, who worked for Galleon in Taiwan and claimed to have a source at Santa Clara-based Synaptics, Smith said. Liu’s information proved to be very accurate.
“Joe was the ‘axe’ in Synaptics,” Smith quoted Rajaratnam as saying.
“The axe is a general term used on Wall Street to mean someone who is very good at predicting which way the stock will move,” Smith said when asked by Michaelson what the phrase meant. Liu was “the authority,” Smith said.
Jurors again heard recordings of Rajaratnam’s wiretapped conversations. In one from May 2, 2008, Rajaratnam and Galleon executives Krish Panu and Kris Chellam discussed what Rajaratnam said was “confidential” news that Spansion might be bought.
Rajaratnam, according to the tape, said they should communicate furtively about the deal and suggested hiding their knowledge by asking a Galleon analyst to do research. “We just have an e-mail trail,” he said, according to the recording.
Chellam joined Galleon from Xilinx in 2007 and Panu from AtRoad Inc. Both invested in Galleon beforehand, according to tax returns entered into evidence. Prosecutors say Rajaratnam got tips from both men. Neither has been charged with a crime.
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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