The second phase of the FBI’s insider trading probe — the one linked to all those SAC alum — has centered around expert networks and third-party consultants.
Almost one month into the insider trading trial of Raj Rajaratnam, the phrase “expert network” had not entered into its lexicon.
Today, however, one of Raj’s former portfolio managers at Galleon introduced the concept for the first time.
Smith testified earlier today that his job included trying to find an “edge” in the market — a definite figure gained from an insider at a public company about that company’s earnings or gross margin or predicted revenue, that was not yet public.
And Smith says Raj “was willing to pay for it,” according to the WSJ.
Smith told jurors that Galleon hired an Intel employee as a consultant — through an expert network firm — “in exchange for early access to revenue and other financial information about the chip maker.” He also said the hedge fund recruited a Taiwanese employee of IntersilCorp to do the same.
According to the WSJ,
Mr. Smith said he met the Intel employee through a third-party “expert networking” firm and the employee suggested in 2004 that he have a direct consulting agreement with Galleon.
“When you proposed the deal to Mr. Rajaratnam, what did he say?” asked Special Assistant U.S. Attorney Andrew Michaelson. “He agreed to it,” Mr. Smith said.
That Intel worker was Michael Tomlinson. He tipped Smith on Intel’s capital purchases, Smith told jurors.
Mr. Tomlinson, at a dinner in New York later in 2004, allegedly told Mr. Smith that he could provide Galleon with information about the firm’s revenue and gross margins; he had a relative working in Intel’s finance department, Mr. Smith said. Mr. Tomlinson suggested that he enter into a direct consulting agreement with Galleon, as opposed to working through the expert-networking firm, Mr. Smith said.
Mr. Smith said he wasn’t authorised to enter the agreement and asked Mr. Rajaratnam, as Galleon’s founder and general partner, to approve it. Mr. Rajaratnam did so, Mr. Smith testified, and Mr. Tomlinson was paid through a separate company he had started.
Smith says the relationship ended after six months because the figures weren’t accurate.