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Two plead guilty to insider trading in Galleon inquiry

US sees its case against founder getting stronger

By Larry Neumeister
Associated Press / January 27, 2011

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NEW YORK — The government strengthened its case against Galleon Group hedge fund founder Raj Rajaratnam yesterday when two of his former employees pleaded guilty to insider trading, with one of them admitting he gave the onetime billionaire secrets about publicly traded companies.

Former Galleon portfolio manager Adam Smith, 38, entered the plea in US District Court to securities fraud and conspiracy to commit securities fraud, charges which carry a potential penalty of up to 25 years in prison. He agreed to testify against Rajaratnam.

In return, prosecutors agreed not to prosecute him for other crimes, including the destruction of computer records and documents in October and November 2009, in a case prosecutors say generated more than $50 million in profits.

Michael Cardillo, 33, pleaded guilty to the same charges as Smith, saying he joined the insider-trading conspiracy while employed at Galleon from 2003 through 2009. Cardillo is also cooperating with the government in a bid for leniency.

Both men agreed to give up any money they had made.

They are among more than 15 people who have pleaded guilty in what prosecutors call the biggest hedge fund insider-trading case ever. More than 25 people have been charged. It was the first significant use of wiretaps in an insider-trading case. And the investigation has led to another major probe of those in the securities industry who pass inside information to hedge funds, calling it research.

Rajaratnam has said he based his trades on public information. He had pleaded not guilty and remains free on $100 million bail.

The pleas from Smith and Cardillo came a week after Rajaratnam’s codefendant, Danielle Chiesi, pleaded guilty to conspiracy to commit securities fraud in a plea deal that suggests she serve 37 to 46 months in prison. She had faced up to 155 years. Charges against Rajaratnam carry a potential penalty of 185 years.

Smith was penitent in his remarks before Judge John G. Koeltl.

“I knew what I was doing was wrong,’’ he said. “I am forever remorseful about this terrible mistake.’’

Smith said that in May 2008 he provided Rajaratnam with inside information about a potential acquisition of Vishay Intertechnology Inc., a chip maker in Malvern, Pa.

“I did purchase securities based on that information, and I thought it likely that Raj Rajaratnam would do the same in his accounts,’’ Smith said.

Smith said he participated from 2003 through 2009 in a conspiracy with Rajaratnam and other Galleon employees to share inside information about mergers and acquisitions as well as quarterly earnings announcements and business updates.

Smith acknowledged obtaining inside information regarding the communications chip maker Integrated Device Technology Inc.’s June 2005 acquisition of Integrated Circuit, the July 2006 acquisition of ATI Technologies Inc. by Advanced Micro Devices Inc., and the potential acquisition of Vishay.

Some information, he said, was obtained from an investment banker. He said he sometimes obtained quarterly revenue information ahead of its public announcement from an employee of semiconductor maker Intersil Corp. and obtained Nvidia Corp.’s quarterly revenue information from a Nvidia employee ahead of its announcement.

Smith acknowledged providing the information about the public companies to Rajaratnam.

Outside court, attorney Michael Feldberg said his client was a “fine young man.’’

“He made a mistake, confronted it, acknowledged it,’’ he said.

Sentencing was scheduled for Oct. 21.

Cardillo said he was “very sorry for having acted as I did.’’

His sentencing was set for April 26, though it was expected to be postponed.