November 28, 2020

DealBook: Trader Who Worked With Galleon Pleads Guilty

Craig DrimalFrank Franklin II/Associated Press Craig Drimal leaving the Federal District Court in Manhattan in November 2009.

As jurors continued to deliberate the fate of Raj Rajaratnam on Tuesday, four floors above them, a trader associated with Mr. Rajaratnam’s Galleon Group hedge fund pleaded guilty to insider trading.

Craig Drimal, a trader who worked closely with Galleon, is the 21st of the 26 people charged in the broader insider trading ring connected to Mr. Rajaratnam who have pleaded guilty. Mr. Drimal was scheduled to go on trial next month.

In the courtroom of Judge Richard Sullivan, Mr. Drimal, 54, admitted to earning $6.4 million in illegal profit trading on inside information provided by lawyers at Ropes Gray who were working on merger deals with 3Com and Axcan Pharma. Mr. Drimal admitted to passing those tips on to a trader at Galleon.

“At the time I did these trades, I believed my conduct was illegal and wrong, and I deeply regret these actions which caused so much pain to my family and friends,” he said.

Judge Sullivan set his sentencing for Sept. 9. His recommended sentence is 70 to 87 months.

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.

Downstairs at the Mr. Rajaratnam trial, jurors asked the judge to replay nine secretly recorded phone conversations between Mr. Rajaratnam and his alleged accomplices. Mr. Rajaratnam is charged with 14 counts of insider trading-related crimes and could face up to 25 years in prison if convicted.

There was little commonality among the nine wiretaps, which included Mr. Rajaratnam chatting with cooperating witnesses. Anil Kumar and Rajiv Goel, as well with his brother Rengan Rajaratnam. Jurors reheard discussions about confidential information regarding publicly traded stocks including Advanced Micro Devices and and Spansion.

They also listened to a wiretap on which Mr. Rajaratnam coaches his colleagues on how to create an “e-mail trail” to make it appear that their trading was legitimate.

Among the more eventful moments of the morning came when a pair of security guards rushed toward the jury room and sent out an emergency call for the courthouse nurse. Apparently, an easel displaying exhibits fell on one of the jurors arms. When the jury entered the courtroom to listen to the audiotapes, a female juror’s left arm was wrapped in a bandage.

Article source: http://feeds.nytimes.com/click.phdo?i=729687586613e36906c33c66b6cc3573

DealBook: Educator Salutes Galleon Trial Defendant

Geoffrey Canada, of the Harlem Children’s Zone, testified in support of  Raj Rajaratnam.Warren Toda/European Pressphoto Agency Geoffrey Canada of the Harlem Children’s Zone testified in support of Raj Rajaratnam.

8:55 p.m. | Updated

Though he took the stand for just 10 minutes, Geoffrey Canada, the president and chief executive of the Harlem Children’s Zone, offered some of the most distinctive testimony in the trial of hedge fund billionaire Raj Rajaratnam.

Mr. Canada, a world-renowned educator whose program in Harlem has been widely lauded for its efforts to close the achievement gap, offered jurors their first glimpse of a generous and big-hearted Mr. Rajaratnam.

That depiction was in sharp contrast to what prosecutors have described as a greedy tycoon who had made millions trading on inside information when he ran the Galleon Group hedge fund.

Mr. Canada told jurors that he met Mr. Rajaratnam about seven years ago while fund-raising for his program. They chatted at Mr. Rajaratnam’s office in Midtown Manhattan, and “hit it off right away,” Mr. Canada said.

They talked about how children from impoverished backgrounds do not have the same opportunities as those with more comfortable upbringings, he testified. Mr. Rajaratnam’s concern for children was immediately apparent, Mr. Canada testified, in part, he said he believed, because Mr. Rajaratnam had children of his own.


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.

“His wish was that we could level the playing field for kids,” Mr. Canada said. “He wanted our kids to have the same support his kids had.”

Though Mr. Canada did not disclose how much money Mr. Rajaratnam had given to his cause, he described Mr. Rajaratnam, a former board member of the Harlem Children’s Zone, as generous and said that his support was “extraordinary” and “spontaneous.”

He said he considered Mr. Rajaratnam a “dear friend,” and even helped guarantee part of Mr. Rajaratnam’s $100 million bail after his arrest in October 2009.

Mr. Canada’s testimony could stand out for jurors, who have grown accustomed to hearing mainly from Wall Street executives, including Lloyd C. Blankfein, chief executive of Goldman Sachs.

Wall Street has been particularly fond of supporting Mr. Canada’s cause, which helps administer a range of social and educational services to families within a roughly 100-block area of Harlem. Though some researchers have said that there is not enough evidence to measure the effect of the costly initiative, the program has attracted admirers from Harvard to the White House.

More broadly, Mr. Canada is something of a darling among a certain set of politicians, educators and academics for his efforts to create a pipeline for urban youth from the “cradle to college.” He was prominently featured in a recent documentary on urban education, “Waiting for Superman.”

The rest of Wednesday’s session in Federal District Court in Manhattan could not have stood in sharper contrast.

The government declined to cross-examine Mr. Canada, whose appeared briefly between the earlier and later parts of the testimony of Richard Schutte, the former president of Galleon.

No such courtesy was extended to Mr. Schutte, who, from virtually the start of cross-examination, butted heads with Reed Brodsky, the prosecutor.

On the stand, Mr. Schutte has cut a stoic figure, offering little in the way of colorful descriptions or humorous anecdotes that some of earlier witnesses had. That attention to precision served him well in the defense’s direct examination of him, when he often corrected a defense lawyer, Michael Starr, when he was asked technical questions.

During that time, Mr. Starr presented hundreds of exhibits relating to stocks about which prosecutors contend Mr. Rajaratnam received confidential information. Among them were research reports and news articles that, the defense has argued, were reason enough for Mr. Rajaratnam to make the trades at the center of the case.

Mr. Brodsky spent a much time Wednesday offering a different set of exhibits that conflicted with those presented by the defense. Mr. Brodsky repeatedly asserted that the defense exhibits had been cherry-picked, and that they represented a small fraction of the research and notes that Galleon analysts received.

For instance, the defense showed research reports that expected poor quarterly financial results for Xilinx, a semiconductor company whose shares Mr. Rajaratnam is accused of betting against using insider tips.

Mr. Brodsky offered several reports where analysts said they saw potential upside for the company, including one by an analyst from Bear Stearns who predicted the company would perform according to Wall Street expectations. Mr. Schutte said he did not recognize the analyst’s name.

As it turned out, the company revised its outlook down, and the Bear Stearns analyst was wrong.

“Now I know why I didn’t recognize the guy’s name,” Mr. Schutte said.

Mr. Brodsky also challenged assertions by the defense in connection to the sale of shares in Goldman Sachs.

Mr. Rajaratnam is accused of selling shares in Goldman in late October, after a tip from a former board member, Rajat K. Gupta, that the bank would soon report its first quarterly loss as a public company.

Defense lawyers sought to deflect that accusation, in part, by suggesting that Mr. Rajaratnam sold shares because the firm had a large investment in the Industrial and Commercial Bank of China, whose stock was faring poorly. Mr. Brodsky tried to demonstrate the inconsistency of that argument. He showed jurors that just two days earlier, with Goldman’s investment in the Chinese bank performing nearly as poorly, Mr. Rajaratnam had actually bought 150,000 shares of Goldman stock.

Article source: http://feeds.nytimes.com/click.phdo?i=1e424982fbcebdacd848cc41ab7a44cb

DealBook: For a Galleon Ex-Manager, Questions of Motivation

Twice last year, Adam Smith, a former portfolio manager at the Galleon Group hedge fund, met with lawyers for its co-founder, Raj Rajaratnam, who had been charged with netting tens of millions through insider trading.

On Thursday, Mr. Smith’s interviews with the defense lawyers were the focus of Mr. Rajaratnam’s trial.

Earlier this week, Mr. Smith, a cooperating witness who faces up to 25 years in prison after pleading guilty to insider trading, told jurors he routinely traded shares of technology companies based on inside data. In most cases, he said, “I shared it with Raj.”


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.

But in a heated exchange on Thursday, defense attorney Terence J. Lynam confronted Mr. Smith, claiming he did not tell Mr. Rajaratnam’s defense team, when they had interviewed him in February and July of 2010, anything about the insider trading offenses that Mr. Smith later said he had committed.

“I was only answering the specific questions,” Mr. Smith said. “I wasn’t volunteering any information.”

“You said you didn’t know of any insider information, right?” Mr. Lynam said, raising his voice.

“I wasn’t asked about any insider information,” Mr. Smith responded.

The implication, according to the defense, was that Mr. Smith divulged to the federal government that he had participated in an insider trading scheme only to try lessen his sentence.

During his testimony earlier this week, Mr. Smith walked the jury through a number of times when, he said, he obtained nonpublic information for himself and his boss, Mr. Rajaratnam.

Andrew Michaelson, a prosecutor, reminded jurors of e-mails sent from Mr. Smith to Mr. Rajaratnam about Integrated Device Technology’s planned acquisition of Integrated Circuit Systems in 2005. The tips came from a Morgan Stanley investment banker, Kamal Ahmed.

The subject line in those e-mails was “The two eyes,” a code that used the first initials of both companies. In each, he relayed tips about the deal’s progress. One read: “I had a chance to update and we are still on track.” A later e-mail had the subject line “Eyes” and said, “Game on.”

Mr. Lynam tried to show that the information Mr. Smith said he shared with Mr. Rajaratnam was already the subject of market speculation and therefore already public — for instance, the 2006 acquisition of A.T.I. by Advanced Micro Devices.

The defense showed an e-mail alert sent to Mr. Smith from a technology news service called ChinaByte. Citing a source, the e-mail said a deal had been reached for A.M.D. to acquire A.T.I.

“It’s true, there were a number of rumors, yes,” Mr. Smith said.

But Mr. Lynam also tried to establish the point that Mr. Smith’s own analysis gave him reason enough to trade in the company.

He pointed to e-mails from Mr. Smith to others in the Galleon Group, including Mr. Rajaratnam, in which he talked about A.T.I.’s fundamental value, often forwarding an analyst’s research.

Mr. Lynam said that with the research and Mr. Smith’s own glowing reviews, there was ample reason to buy A.T.I. without any insider information.

“Yes, but they also don’t mean I didn’t have insider information,” Mr. Smith replied.

The defense tried to distance Mr. Smith’s trades from Mr. Rajaratnam’s, focusing in part on the company Intersil. Mr. Smith testified earlier this week that he had a source in Taiwan who had leaked him the company’s quarterly earnings before they were publicly announced.

In early 2009, for instance, just before the company reported earnings, Mr. Rajaratnam did not trade any shares in the company for more than a month.

“You claimed that you told Mr. Rajaratnam inside information about Intersil’s earnings, but he’s not even trading in the period up to this?” Mr. Lynam asked.

“That’s true, in this case,” Mr. Smith replied.

Prosecutors, however, offered their own trading examples.

Twice in 2004, during a particularly rough patch for the Intersil, the company said that their earnings would fall below expectations. Mr. Smith’s said in testimony earlier in the week that a source at the company, Jason Lin, tipped him to the bad news. Mr. Smith, in turn, shared that information with Mr. Rajaratnam.

In the days before the second announcement on Oct. 6, 2004, Mr. Rajaratnam placed a negative bet on the company, shorting 125,000 shares, according to the slides presented by prosecutors.

Article source: http://feeds.nytimes.com/click.phdo?i=584d2776decb1570ee7a3b48323b70e6

DealBook: Ex-Galleon Worker Tells of Gathering Tips on Intersil

“I shared it with Raj.”

Those five words served as a mantra for Adam Smith, a government witness who took the stand on Tuesday in the insider trading trial of Raj Rajaratnam, the founder of the Galleon Group hedge fund.

Mr. Smith, a former Galleon portfolio manager, is the first former Galleon employee to testify during the trial. He has pleaded guilty to participating in an insider trading conspiracy with Mr. Rajaratnam.


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

Known for his rapier wit around Galleon’s offices, the 39-year-old Mr. Smith was dead serious on the witness stand on Tuesday as he took the jury through four discrete insider trading vignettes involving technology companies. DealBook will have the full report later. For now we’ll focus on the vignette involving Intersil, a chip maker.

Mr. Smith, who joined Galleon in 2002 after a stint as an investment banker at Morgan Stanley, said he developed a relationship with an Intersil executive named Jason Lin who worked in Taipei, Taiwan. Once a quarter, Mr. Smith would travel to Taiwan to meet with Mr. Lin. They initially discussed industry issues and “more qualitative types of information,” said Mr. Smith.

But over time, Mr. Smith testified, he asked Mr. Line to be more specific. “There did come a time when he was able to give me Intersil’s quarterly revenue numbers,” Mr. Smith said.

Mr. Smith, who covered Intersil for Galleon, said this information was most useful “when it varied from Wall Street consensus.” He said he passed the information on to Mr. Rajaratnam.

“Why?” asked Andrew Michaelson, the prosecutor.

“I was getting an edge on a company I covered,” Mr. Smith said. “My motivation was to improve the profitability of my firm and to help Raj.”

Mr. Michaelson asked Mr. Smith to define “an edge.”

Mr. Smith said it was a source of information that could inform a decision about buying and selling a stock. “It’s the key component to arbitraging consensus, which was essentially our strategy,” he said. “Whenever an event would occur that would vary from consensus, we would want an edge.”

Mr. Lin’s information would help Mr. Smith, a Harvard Business School graduate, in his research on Intersil. It would help “build my Excel model,” Mr. Smith explained. “I would plug in the revenue and estimate profit and loss.”

When Mr. Michaelson asked Mr. Smith if he also did actual security analysis on Intersil, Mr. Smith said that he did but that he really did not consider the confidential revenue numbers provided by Mr. Lin to be legitimate research.

“Getting the number is more like cheating on the test,” Mr. Smith said.

Intuiting that Mr. Smith’s simile could have resonated with the jury, Mr. Michaelson continued.

“Did you do your homework on Intersil?” he asked.

“Yes,” Mr. Smith said.

“Did you also cheat on the test?”

“Yes,” Mr. Smith said.

Article source: http://feeds.nytimes.com/click.phdo?i=52019a8d4aabb646ce34adbf3d8b9e23