UPDATE 1-Rajaratnam trial lawyers push research defense

* Ex-Galleon manager acknowledges speculation before deal

* Rajaratnam insider trading trial in fourth week

* Jurors see internal Galleon trading records
(Updates with trial testimony, trading details; adds byline)

By Grant McCool and Basil Katz

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.

Similarly on Thursday, former Galleon portfolio manager
Adam Smith acknowledged under questioning that “there were a
number of rumors” 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.

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

Smith, 39, on his third day on the witness stand in
Manhattan federal court, has testified that he was tipped in
May 2006 by a Morgan Stanley (MS.N: Quote, Profile, Research) banker, Kamal Ahmed, who
gave confidential details of AMD’s interest in buying ATI.

Smith said he then told Rajaratnam, who is charged with 14
counts of conspiracy and securities fraud in making $45 million
in illicit profit between 2003 and March 2009, mostly on tech
stocks. His lawyers contend that research and market
speculation, not material company secrets, guided his trades.

Smith is among 19 people who have pleaded guilty in the
sweeping Galleon case, which is described by prosecutors as the
biggest probe of hedge funds in history.

The trial began on March 8 and will resume on Monday.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

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]

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Defense lawyer Terence Lynam showed emails to the jury and
Smith 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 in additional questioning after the cross-examination,
the government sought to reinforce its allegation that Galleon
and Rajaratnam relied on inside information. Smith was asked by
prosecutor Andrew Michaelson about a conference call on July 5,
2006, between ATI chief executive David Orton and Galleon
technology researchers.

“What did he tell you about the possible acquisition by
AMD?” Michaelson asked Smith. “Nothing,” he replied.

No charges have been announced against Ahmed, who has been
put on leave by the investment bank.

On Thursday, the jurors also heard that alleged tips by
Ahmed on a 2005 merger announcement between Integrated Device
Technology IDT (IDT.N: Quote, Profile, Research) and Integrated Circuit Systems Inc
(ICST) led to $2 million in trading profits for Rajaratnam.

The defense said Rajaratnam’s trades were based on internal
Galleon research. Smith told the jury he would periodically
check in with Ahmed in the months leading up to the deal’s
announcement and would send Rajaratnam emails about its
status.

Prosecutors pointed to internal Galleon trading records
indicating that Rajaratnam bought $3 million worth of ICST
stock days after an email on March 17, 2005, from Smith to
Rajaratnam about the deal that said “game on.” Prosecutors said
Rajaratnam dumped the stock after the June 15 announcement of
IDT buying ICST.

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.

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, Gary
Hill)

UPDATE 1-Rajaratnam trial lawyers push research defense