May 24, 2024

DealBook: Galleon Chief Put Millions Into Fund of Ex-Employee

Richard Schutte, former president and chief of research at the Galleon Group, arriving at federal court.Louis Lanzano/Bloomberg News Richard Schutte, former president and chief of research at the Galleon Group, arriving at federal court.

9:09 p.m. | Updated

Eight weeks before the start of his trial on insider-trading charges, Raj Rajaratnam’s family invested $15 million in a hedge fund started by a former employee who has been testifying this week on Mr. Rajaratnam’s behalf.

The investment, which came on top of an initial $10 million made months earlier, was disclosed on Thursday as prosecutors cross-examined Richard Schutte, a former president of Mr. Rajaratnam’s Galleon Group.

Mr. Schutte started his own hedge fund, SpotTail Capital Advisers, as he was unwinding Galleon after Mr. Rajaratnam’s arrest in October 2009. Mr. Rajaratnam is by far the largest investor in SpotTail, which manages about $35 million.

Reed Brodsky, a federal prosecutor, finished his cross-examination of Mr. Schutte with this detail, raising the question of whether the investment was in some way compensation for his testimony on Mr. Rajaratnam’s behalf.

It was the first time jurors had heard of the investment. On direct examination, the defense had never even mentioned the existence of SpotTail.

The defense quickly sought to defuse the notion that Mr. Rajaratnam’s SpotTail investment was meant to encourage Mr. Schutte’s testimony. Mr. Rajaratnam respected Mr. Schutte, a former Goldman Sachs analyst, as a money manager, the defense said. After all, he had hired Mr. Schutte to work for him back in 2004 as a portfolio manager.

The moment interrupted what had been an otherwise routine day in Federal District Court in Manhattan. Since taking the stand on Monday, Mr. Schutte has been inundated with exhibits from both defense lawyers and prosecutors in an effort to show whether the information Mr. Rajaratnam used to make his trades was already public.

The Galleon networkAzam Ahmed and Guilbert Gates/The New York Times Click on the above graphic to get a visual overview of the Galleon information network.

The defense has tried to show that details about the deals and earnings reports at the center of the insider-trading charges against Mr. Rajaratnam were public and could have been derived from research and analysis.

Over the last few days, with Mr. Schutte on the stand, Mr. Rajaratnam’s lawyers have presented hundreds of exhibits to support that thesis, drawing from Galleon e-mails and dozens of articles from research firms and the news media.

But prosecutors have argued that the issue is not whether the information was publicly available as rumor or speculation, but whether Galleon had actually used that information to inform its trades, instead of using confidential information to do so.

While Mr. Schutte’s testimony was meant to offer an inside view of Galleon, the next witness on Thursday was meant to provide an outside opinion.

Gregg A. Jarrell, a professor at the business school of the University of Rochester and a former top economist at the Securities and Exchange Commission, was retained by the defense in early 2010 to analyze the trades Mr. Rajaratnam is accused of making with inside information.

So far, he, and the research firm with which he is working to gather the data, are nearing $1 million in billed work, he said.

One thing became abundantly clear in his testimony Thursday: Galleon and its founder, Mr. Rajaratnam, traded a lot.

Mr. Jarrell examined more than a million trades at Galleon from 2005 to 2009, 30,000 of which were completed by Mr. Rajaratnam. That amounts to 7,287 trades a year or about 30 trades a day. In 2009 alone, Mr. Rajaratnam traded shares of more than 600 companies before his arrest.

The dollar amount of Mr. Rajaratnam’s trades is staggering. Through the entire five-year period, Mr. Rajaratnam racked up exactly $172,104,508,398 in trades, according to a presentation by the defense. Averaged out, his daily trading volume was $141,533,313.

“It’s mind-boggling,” Mr. Jarrell. “That’s a lot of trading.”

Of all the trades Mr. Rajaratnam conducted in that period, only 126 are suspected to have been based on inside information, or about 0.3 percent, Mr. Jarrell said.

Mr. Jarrell was contracted to conduct so-called event studies, complex statistical models that measure the difference between how a given stock ordinarily reacts to market conditions and how it reacts to a specific related event.

The idea is to determine the significance of material information — like a merger announcement or an earnings release — on the company’s share price. The defense spent the rest of Thursday focusing on one stock: Advanced Micro Devices.

Near the end of its case, the government produced an exhibit that tallied all the illicit gains it says Mr. Rajaratnam made. The total was about $63 million, a figure that did not include a transaction in A.M.D. that has been a focus of the trial.

That transaction related to the spinoff of a division of the company, a tip prosecutors have said Mr. Rajaratnam received from a former executive at McKinsey Company in August 2008, almost two months before the official announcement.

Ultimately, Mr. Jarrell said, Mr. Rajaratnam’s bet on A.M.D. turned out to be a major loss. Using the same methodology as the F.B.I., Mr. Jarrell said that Mr. Rajaratnam’s trades in A.M.D. had led to more than $67 million in losses. That is almost $4 million more than the $63 million Mr. Rajaratnam is accused of making in illicit profits, he said.

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