This afternoon, former Galleon trader Adam Smith will take the stand in the Raj Rajaratnam insider trading trial.
He is the first former Galleonite to testify against his old boss.
He plead guilty to insider trading earlier this year, and is one of the government’s star witnesses.
“I knew what I was doing was wrong,” Smith told the court in January. “I am forever remorseful about this terrible mistake.”
In their complaint against Smith, the SEC said:
Smith caused certain Galleon funds that he managed to trade on the basis of the material nonpublic information he received from the investment bank source. Upon receipt of the information, Smith substantially increased the size of an existing ATI long position that the Galleon funds he managed had in place.
The government negotiated a deal in which they wouldn’t prosecute Smith for destroying computer records and other documents at the tail-end of 2009, because he agreed to testify against Raj.
He earned an MBA from Harvard and joined Galleon in 2002. In 2006, he became a portfolio manager of the Galleon Emerging Technology Funds — aka the Galleon Communications Funds. When the hedge fund liquidated after Raj’s arrest, Smith reportedly launched his own hedge fund with two other Galleon alum called OLA Capital.
Why The defence And The Government Are Scared Of Smith’s Testimony
Smith has already been introduced to the jury. The government played wiretaps earlier in the trial, in which Smith and his boss talk abut a company called Vishay in May 2008. “Listen, ah, I talked to Kamal last night,” Smith says to Raj. “They bid on a deal for Vishay… It’s a private equity. And they lost, so CSFB got the mandate… Um but they said they’re finally a willing seller, the deal looks phenomenal to him.”
In that conversation, Kamal is assumed to be Morgan Stanley banker Kamal Ahmed, who the government alleges tipped Smith off because he had insider knowledge of the Vishay deal. Smith told the FBI that Raj’s brother, Rengan, had told Smith, after Raj was arrested in October 2009, that “when someone discussed ‘Kamal’ with Raj, Raj would say it was a reference to Kamal Das, a sell- side analyst,” and not Kamal Ahmed.
The defence pleaded with Judge Holwell last night to forbid the prosecution from questioning Smith over that exchange because it happened months after Raj was arrested and outside the dates of the alleged conspiracy. The Judge will make his decision today.
But that conversation isn’t the only part of Smith’s potential testimony over which each legal team is dueling.
And the defence has already made attempts to diminish the damage his testimony could do their case.
Smith also told the FBI that after Raj was arrested in 2009, his brother Rengan appeared at the Galleon office and “took his sibling’s notebooks.”
Raj’s attorneys want Judge Holwell to prevent Smith from testifying about Rengan’s notebook removals because they say that Raj “while under arrest, had no control over his brother’s actions” and that the documents were taken because a defence lawyer had wanted them to prepare for a bail hearing.
“It would be impermissibly prejudicial, and of no probative value whatsoever, for the government to elicit testimony suggesting that Mr. Rajaratnam and his brother were concealing evidence,” Raj’s attorney John Dowd argued.
But obviously the government is keen to have the testimony included because they say it will help “prove the existence of the charged conspiracy and Rengan’s membership in it,” according to the letter sent to the court.
Smith reportedly met up with Rengan twice in Spring last year. During one of those meetings, “Rengan asked about Smith’s “little black book of information” and wanted “to confirm” that he “was not going to say anything about the notebooks or black book” according to Bloomberg.