NEW YORK – The government strengthened its case against Galleon Group hedge fund founder Raj Rajaratnam on Wednesday when two of his former employees pleaded guilty to insider trading charges, with one of them admitting he gave the one-time billionaire secrets about publicly traded companies.
Former Galleon portfolio manager Adam Smith, 38, entered the plea in U.S. District Court in Manhattan 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 if prosecutors request it.
In return for Smith's cooperation, prosecutors said in court papers that they agreed not to further 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.
In a second plea Wednesday, 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, where he worked in the back office, as a trader and as a portfolio manager. Cardillo also was cooperating with the government in a bid for sentencing leniency.
Both men also agreed to give up any money they had made, and Cardillo agreed to testify at any trial if called.
Smith and Cardillo are among more than 15 people who have pleaded guilty in what prosecutors have called the biggest hedge fund insider trading case ever. In all, more than 25 people have been charged in the prosecution that marked the first significant use of wiretaps in an insider trading case. The investigation has led to another major probe of those in the securities industry who pass inside information along to hedge funds as legitimate research.
Rajaratnam has said he only made trades based on publicly available information. He had pleaded not guilty and remains free on $100 million bail.
The pleas came a week after Rajaratnam's co-defendant, Danielle Chiesi, pleaded guilty to conspiracy to commit securities fraud in a plea deal that suggested she serve between 37 months and 46 months in prison. She had originally faced up to 155 years in prison. Charges against Rajaratnam carry a potential penalty of up to 185 years in prison.
Wiretaps were cited by prosecutors as among evidence they gathered against the bearded and bespectacled Smith, who was remorseful in his remarks before Judge John G. Koeltl.
"I knew what I was doing was wrong. I am forever remorseful about this terrible mistake," Smith said.
Smith said he spoke with Rajaratnam in May 2008, providing him with inside information about a potential acquisition of Vishay Intertechnology Inc., a chip maker based 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, business updates and other corporate events.
Among other information, Smith acknowledged obtaining inside information regarding 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.
As part of his plea, 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.
During his plea, 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.
Outside court, attorney Marjorie J. Peerce said Cardillo was looking forwarding to getting on with his life with his wife and young children.