Wall Street's most sensational insider trading trial in years has heard how a former trusted colleague of the accused cheated to reap "a lot of money" for their firm.
Adam Smith, a one-time golden boy of the financial world, told the New York federal court that he repeatedly used confidential information gleaned from industry sources to give Galleon Group hedge fund, and his boss Raj Rajaratnam, an "edge."
"I knew the answer ahead of time," 39-year-old Smith, who has already pleaded guilty to conspiracy to commit fraud while at Galleon, said.
Rajaratnam faces up to 25 years in prison if convicted of running the alleged insider trading ring. The Sri Lankan-born billionaire founder of Galleon has pleaded not guilty and says that the secret of his success was based on nothing more than research into publicly available information.
Smith, the first former Galleon employee to take the stand in the expected two-month trial, said he -- and Rajaratnam -- went much further.
"Research is sort of doing your homework," the Harvard Business School graduate said. "Getting the number is more like cheating on the test."
He said that getting such numbers -- like companies' quarterly earnings ahead of their announcement -- "was skipping to the answer essentially."
Knowing such information ahead of the public takes the guesswork out of deciding whether to buy or sell shares, which typically move up or down as soon as soon as company results are published.
His motivation, Smith said, was "to improve the profitability of my firm and to help Raj."
"You can make a lot of money with very little risk," he said.
Rajaratnam, 53, is accused of earning millions of dollars through trading based on illegally obtained information -- including from a Goldman Sachs board member -- between 2003 and 2009.
The case is seen as part of a major effort by prosecutors to crack down on insider trading and it is unusual because of the extensive use of wiretapped phone conversations -- a technique more common in mafia probes.
Smith is testifying against his former mentor, whom he referred to throughout by his first name Raj, in a deal with prosecutors that he hopes will result in him being compensated with a more lenient sentence for fraud.
Dressed smartly and talking in a relaxed, confident voice, Smith gave detailed testimony about several instances of what he said was a network of sources.
One allegedly involved an Intel Corp employee who promised inside access because he had a relative working in the company's finance department.
Another was allegedly a Taiwan-based worker at semiconducter manufacturer Intersil who was able to give accurate information about company earnings before their publication.
Another alleged source was Kamal Ahmed, a former Morgan Stanley banker and friend of Smith, who allegedly gave an illegal heads up on the merger of Integrated Circuit Systems and Integrated Device Technology -- a deal that Smith referred to in emails by the code name "two eyes."
In each case, Rajaratnam either approved the action or was at least kept informed, Smith said. "He agreed to it," Smith said of Rajaratnam in the alleged Intel case.
Facing a maximum of 25 years in prison, Smith agreed to a cooperation deal with investigators, including the FBI who he said coached him in how to lure those being investigated into revealing evidence during secretly recorded telephone conversations.
The undercover role meant lying for the government, rather than to make a profit. Smith said he was trained "how to craft a story..., to keep the person on the other end talking."
He has been promised a letter from prosecutors to the sentencing judge detailing his help against Rajaratnam, but only the judge decides.
Rajaratnam's lawyers have yet to begin their defense in the marathon trial, but in cross examination of government witnesses they have sought to show that information used to make trades at Galleon in fact came from legitimate sources and exhaustive research.
Smith could face tough questions over his plea bargain with prosecutors when his cross examination begins. Before the jury was brought into the courtroom Tuesday, the defense told Judge Richard Holwell of "an extraordinary effort by Smith to inculpate others and save himself."© ANP/AFP