‘Galleon’ Case Defense Gets Trial Run in Unrelated Prosecution
The U.S. government rested its case today in a prosecution that may provide a preview of next year’s trial of Galleon Group LLC co-founder Raj Rajaratnam, accused of helping direct the largest-ever hedge fund insider trading scam.
The week-long trial of Joseph Contorinis, 46, a former general partner of the Jefferies Paragon Fund, has yielded testimony by an ex-UBS AG (UBSN) investment banker that he was fed secret tips by a former managing director at Blackstone (BX) Group LP, and that he leaked information on mergers to an analyst at SAC Capital Advisors LP.
The trial, though unrelated to the Galleon case, may show how Rajaratnam’s defense, that he traded based on public information and press reports, will resonate with a federal jury in Manhattan. Contorinis has made a similar argument in pleading not guilty in his case, which is being prosecuted by Assistant U.S. Attorneys Andrew Fish and Reed Brodsky -- both also involved in Galleon case.
“It’s an opportunity for the defendants in Rajaratnam to see how the defense plays before a jury,” Jacob Frenkel, a former Securities and Exchange Commission attorney, said in an interview. Frenkel, a partner at Shulman Rogers Gandal Pordy & Ecker PA in Potomac, Maryland, isn’t involved in either case.
Contorinis, who lives in Brooklyn, is accused of earning more than $7 million and avoiding losses of millions more by trading on tips from the government’s chief witness, Nicos Stephanou. An associate director of mergers and acquisitions at Zurich-based UBS, Stephanou told him about transactions from 2004 to 2006, prosecutors said. The trial began Sept. 20.
Stephanou, 36, has pleaded guilty and is testifying in exchange for leniency. He said last week that he routinely told friends from New York and his native Cyprus about companies that were to be acquired. Some trades were executed through offshore accounts he set up, and Stephanou and his friends split the profits, he said.
“He was a close personal friend of mine and I was happy to help him,” Stephanou said of Contorinis.
The 2006 acquisition of Albertsons Inc., then the second-largest U.S. grocer, is at the center of the case. At the time, Contorinis’s hedge fund held more than $70 million in Albertsons stock, prosecutors said. Stephanou was on the UBS team that advised Cerberus Capital Management LP, part of the group trying to buy the grocery chain.
Sushi at Masa
As the deal was being negotiated in December 2005, Stephanou said he alerted Contorinis and other friends to the progress of the talks. Contorinis sold all his Albertsons stock before news that the talks collapsed became public, prosecutors said.
After negotiations resumed, and a group that included Cerberus and Supervalu Inc. (SVU) agreed to buy Albertsons in January 2006, Stephanou testified that he again leaked the news to Contorinis, who immediately bought $45 million in shares.
Days later, Contorinis footed the bill as the two celebrated over sushi at Masa, a restaurant in Manhattan’s Time Warner Center, according to court testimony.
“It was the most, you know, exquisite dinner, sushi dinner I’ve ever had,” Stephanou testified, as prosecutors showed jurors the menu from his $1,000 meal. “I had asked them to send it to me so I’d have it as a reference, as memorabilia,” Stephanou said of the menu.
Stephanou said Contorinis told him how to disguise his insider trading by “trading in and out” of a stock. “He told me not to be greedy,” Stephanou said.
In an opening statement on Sept. 21, lawyers for Contorinis told jurors that his trades were based on newspaper reports and that his rapid buying and selling of Albertsons shares over many months belies the government’s claim that he was trading on inside information. During the trial, defense attorney Theodore Wells assailed Stephanou as a liar who traded on inside tips for more than a decade and deceived prosecutors and family members.
“Your resume says nothing about how you had deceived people for years, correct?” Wells asked Stephanou on cross-examination.
“I didn’t tell people that I was doing inside trading,” Stephanou replied. “I was ashamed and embarrassed to have criminal activities linked to my name.”
In Rajaratnam’s case, scheduled for trial in January, his lawyers similarly have argued that his trades were based on media reports and research, and that his rapid buying and selling of shares over long periods undermines the government’s allegations. Rajaratnam, 53, also has attacked the prosecution’s star witness as a liar.
Jim McCarthy, a spokesman for Rajaratnam, declined to comment.
In the Contorinis case, Stephanou also named five other friends to whom he “provided confidential information,” including Jonathan Hollander. Hollander had worked as an analyst at SAC Capital, the hedge-fund firm run by Steven Cohen, Jonathan Gasthalter, a spokesman for SAC Capital, said in January. Hollander last year was identified as “Tippee 1” in a lawsuit filed by the SEC.
“He is a friend of mine from New York,” Stephanou said of Hollander, who hasn’t been sued by the regulator or charged with criminal wrongdoing.
Hollander’s lawyer, Aitan Goelman, declined to comment. Gasthalter, who declined to comment yesterday, said in January that, “SAC thoroughly investigated this former employee’s trading in Albertsons and, on its own initiative, presented the findings to government authorities in February 2009.”
At the trial, Stephanou testified that he passed along tips about Albertsons learned at UBS. He also had another source of information, according to court records.
On Aug. 27, Contorinis’s lawyers filed court papers saying prosecutors wanted to offer evidence that Stephanou got leaks from Ramesh Chakrapani, a managing director at New York-based Blackstone, the world’s largest private-equity firm, which advised Albertsons.
Prosecutors claim “that Stephanou obtained information from Mr. Chakrapani that Mr. Chakrapani in turn misappropriated from his own employer (Blackstone),” the defense lawyers wrote in court papers. They asked the judge to bar prosecutors from presenting that evidence. Stephanou testified at the trial that he told Contorinis about information he claimed to have received from Chakrapani.
“I told him that my information was coming from the deal team members at UBS and from Ramesh,” he said. Peter Rose, a spokesman for Blackstone, declined to comment.
Chakrapani’s lawyer, Michael Sommer, didn’t return calls seeking comment. Prosecutors and the SEC dismissed civil allegations and criminal charges against Chakrapani following his January 2009 arrest.
Stephanou testified that, after his own arrest, he agreed to make secret tape recordings of Contorinis, Chakrapani and other friends. Defense attorneys told jurors that Contorinis, taped while on vacation in South America, didn’t mention Albertsons, while others did.
One of Stephanou’s friends, Michael Koulouroudis, was sentenced to three months in prison in April after admitting that he traded on tips from Stephanou, according to court papers.
The case is U.S. v. Contorinis, 09-cr-1083, U.S. District Court, Southern District of New York (Manhattan).
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