Rajaratnam trial lawyers push research defense

* Ex-Galleon manager acknowledges speculation before deal

* Rajaratnam insider trading trial in fourth week

By Grant McCool

NEW YORK, March 31 (Reuters) – Raj Rajaratnam did not pick
stocks alone. He had a team of researchers at his Galleon Group
hedge fund to grind through the rumor mill and anticipate a
good bet.

This is the thrust of every cross-examination of government
witnesses at Rajaratnam’s insider trading trial in New York.

His lawyers contend that research and market speculation,
not material company secrets, guided his trades.

In testimony on Thursday, former Galleon portfolio manager
Adam Smith acknowledged that the hedge fund had been awash with
speculation about a possible merger of chipmakers Advanced
Micro Devices Inc (AMD.N: Quote, Profile, Research) and ATI Technologies months before
the announcement of a $5.4 billion deal on July 24, 2006.

“There were a number of rumors, yes,” Smith testified in
Manhattan federal court, as his former boss Rajaratnam looked
at him. Smith said he “turned positive” on ATI stock around
March that year and had told Rajaratnam and others at Galleon.

Defense lawyer Terence Lynam showed emails to the jury to
argue that AMD’s potential acquisition of ATI was so widely
known by early July 2006 that shareholders were writing to top
AMD executives about the possible deal.

But Smith said: “The speculation was public. The fact that
it was happening was not public.”

Smith testified on Tuesday that in May 2006, Kamal Ahmed, a
Morgan Stanley (MS.N: Quote, Profile, Research) banker in California, gave him
confidential details of AMD’s interest in buying ATI. Smith
said he then told Rajaratnam.

No charges have been announced against Ahmed. The
investment bank said in January he had been put on leave.

Smith, 39, who testified for the third straight day, is
among 19 people who have pleaded guilty in the sweeping Galleon
case. It has been described by prosecutors as the biggest probe
of hedge funds in history.

He is the third former business associate or friend to
testify for the prosecution since the trial began on March 8.

Sri Lankan-born Rajaratnam is charged with 14 counts of
conspiracy and securities fraud and making $45 million in
illicit profit between 2003 and March 2009 on dozens of stocks
based on tips from high-placed corporate insiders.

Galleon hedge fund managed $7 billion at its peak. It was
wound down in late 2009 without losses to investors.

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McKinsey in uncomfortable trial glare [ID:nN30131951]

Breakingviews column on Galleon phone taps [ID:nN15264936]

Possible witnesses http://link.reuters.com/meq48r

Graphic on Rajaratnam http://r.reuters.com/jyk48

FACTBOX [ID:nN03153848]

Q+A-The case against Rajaratnam [ID:nN0798137]

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The trial is notable for dozens of recordings of FBI taps
on Rajaratnam’s mobile phone that have been played for jurors.

On Wednesday, the jury heard on a phone tap that Rajaratnam
had advance knowledge from a Goldman Sachs Group Inc (GS.N: Quote, Profile, Research)
director that in October 2008, the Wall Street bank was on its
way to its first quarterly loss as a public company.

“I just heard from somebody who’s on the board of Goldman
Sachs, they are gonna lose $2 per share,” Rajaratnam was heard
telling David Lau, who ran Galleon’s office in Singapore, on
Oct. 24, 2008. “So what he was telling me was that, uh,
Goldman, the quarter’s pretty bad.”

The director was Rajat Gupta, who has since left the
Goldman board. Indian-born Gupta, 62, is also the former
worldwide head of elite McKinsey & Co management consultancy.
Prosecutors describe him as an unindicted co-conspirator in the
case and he is facing civil charges by U.S. market regulators.

Prosecutors played a separate phone tap to support the
allegation that Rajaratnam knew from the same source a day
before it was announced that Goldman would receive a $5 billion
investment from Warren Buffett’s Berkshire Hathaway Inc
(BRKa.N: Quote, Profile, Research)(BRKb.N: Quote, Profile, Research) at the height of the financial crisis in
September 2008 [ID:nN30183141]

The case is USA v Raj Rajaratnam et al, U.S. District Court
for the Southern District of New York, No. 09-01184.
(Additional reporting by Basil Katz; Editing by Ted Kerr)

Rajaratnam trial lawyers push research defense