April 12 (Bloomberg) -- Raj Rajaratnam’s defense to insider trading charges opened yesterday with witnesses who contradicted key government testimony and told the jury how extensive Galleon Group LLC’s research operation was.
Richard “Rick” Schutte, the former president and chief of research at Galleon, testified that Rajaratnam, who co-founded the hedge fund, reviewed dozens of analyst reports each week and was “amazingly educated” about stocks, research and investment strategies.
Schutte said Galleon employed 35 analysts at its peak in early 2008 and each was expected to be expert in as many as 15 companies. The analysts had to file weekly reports to Rajaratnam, he said. Every morning, Rajaratnam led a meeting of dozens of Galleon employees to review new “data points” -- news accounts, regulatory filings and research -- that might influence stock prices, he said.
“He was the most prepared of any of us,” Schutte said of Rajaratnam yesterday in Manhattan federal court. “He’s amazingly educated on the issues at hand.”
The testimony is designed to support Rajaratnam’s claim that his trades were based on Galleon research and not on inside information, as prosecutors allege. 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 trading on tips leaked by corporate insiders and hedge-fund traders.
Defense lawyers said in court last week that Rajaratnam would present at least five witnesses and that his case may be completed by today. They didn’t say whether Rajaratnam would testify.
Schutte testified that Galleon analysts and portfolio managers engaged in a “continuous process of information sharing” as part of its strategy of “arbitraging consensus,” or identifying where Wall Street’s consensus was wrong. Galleon had a “very disciplined, very methodical” process of analyzing research, he said.
“There’s all sorts of information,” he said.
Analysts arrived at work at 7 a.m. and had to be prepared to field questions about the companies they covered at the 8:30 a.m. meeting that Rajaratnam led, Schutte said. Employees who showed up late were fined $25, he said. Rajaratnam then retreated to his office where he fielded phone calls, reviewed data on his six computer screens and met with analysts, he said.
Schutte, who joined Galleon in 2004 and became president in October 2009, shortly before Rajaratnam’s arrest on Oct. 16, 2009, said the company would practice “event-driven investing,” increasing the size of a position in anticipation of some event. He said he sometimes joined Rajaratnam for meetings with corporate executives.
“Did you ever see him ask for inside information?” defense attorney Michael Starr asked.
“No,” Schutte said.
Starr showed jurors news articles, analyst reports and internal Galleon research data relating to Advanced Micro Devices Inc. and Akamai Technologies Inc., two companies on whose stocks Rajaratnam is accused of getting illegal tips.
Rajaratnam, according to prosecutors, got tips on AMD’s planned acquisition of ATI Technologies Inc. in 2006 and on plans that AMD, a Sunnyvale, California-based maker of microprocessors for personal computers, would spin off part of the company in 2008. Rajaratnam also received illegal information that Akamai, based in Cambridge, Massachusetts, would lower its earnings forecasts in 2008, prosecutors said.
Starr showed jurors reports by a Galleon analyst who covered Akamai showing that she continued to see “more data points of softness in their business” in the weeks before the company reported earnings that were lower than expected.
At about the same time that the analyst was writing the reports, Rajaratnam was taking a bearish position on the stock, Starr said.
Earlier, the defense called two witnesses to challenge the testimony of former Galleon portfolio manager Adam Smith, who pleaded guilty to insider trading and is testifying for prosecutors. Smith told jurors that he shared inside tips with Rajaratnam.
John Pernell, who runs the Polaris Prime Technology Fund, said he met Smith for breakfast about a week after Smith pleaded guilty in January. According to Pernell, Smith denied using inside information to trade on several of the stocks at issue, contrary to what he said at his guilty plea.
On cross-examination, Assistant U.S. Attorney Jonathan Streeter asked Pernell whether he had been communicating with Rajaratnam’s lawyers at the time he met with Smith at the Cornell Club in Manhattan. Pernell, who testified that Smith was a “dear friend” who managed the Polaris fund, said he had been.
“Did you tell him you had written a memo to Mr. Dowd?” Streeter asked, referring to John Dowd, one of Rajaratnam’s lawyers.
“No,” Pernell said.
Also testifying for Rajaratnam was Robert Hotz, a lawyer at Akin Gump Strauss Hauer & Feld LLP who represented Rajaratnam until August. Hotz said Smith had denied trading on inside information when Smith was interviewed by defense lawyers in February and July 2010.
“His representation was he was not aware of any insider trading at Galleon,” Hotz said.
“Waiting for Superman”
The defense plans to call as witnesses Gregg Jarrell, the top economist for the U.S. Securities and Exchange Commission from 1984 to 1987, and Galleon analyst Stephen Granoff. Jarrell will serve as an expert witness for the defense.
Rajaratnam’s next witness will be Geoffrey Canada, the creator of the Harlem Children’s Zone, a New York City nonprofit group. Canada was featured last year in the documentary, “Waiting for Superman,” about charter schools. The defense wants him to testify about Rajaratnam’s good character and generosity.
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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