Michael Cardillo, an ex-Galleon Group LLC portfolio manager, testified he traded on Procter & Gamble Co. (PG:US) stock in 2009 after learning that Raj Rajaratnam had a “guy” on the consumer-product’s company’s board.
Cardillo testified yesterday as a witness in the insider- trading trial of Rajat Gupta, who was also a Goldman Sachs Group Inc. (GS:US) director. Gupta is accused of leaking inside information to Rajaratnam that he learned at meetings of the bank’s board and of the board of P&G, where he was also a director.
Cardillo said he and two other portfolio managers sold short P&G stock on Jan. 29, 2009, betting that it would fall. He told jurors in federal court in Manhattan that he was directed to do so by Rajaratnam’s brother, R.K., who was also a Galleon fund manager. Cardillo said he was told that the part of P&G’s earnings known as “organic growth” weren’t as high as previously expected.
“I was told by R.K. that Procter & Gamble was expecting to come in 4 to 6 percent but was actually going to come in lower at 2 to 4 percent,” Cardillo said.
U.S. District Court Judge Jed Rakoff, who’s presiding over the trial, took over questioning of the witness, asking Cardillo what R.K. Rajaratnam had actually told him.
“He told me he was hearing from Raj’s guy on the P&G board,” Cardillo told jurors.
The government said that after the alleged tips were made, certain Galleon funds began selling short 180,000 shares, beginning on Jan. 29, 2009. The company announced their earnings a day later.
Gupta, who ran McKinsey & Co. from 1994 to 2003, is charged with conspiracy and securities fraud. He has pleaded not guilty to the charges.
R.K. Rajaratnam hasn’t been accused of any wrongdoing. A phone message left at R.K. Rajaratnam’s home seeking comment on yesterday’s testimony wasn’t immediately returned.
Cardillo, who pleaded guilty to insider-trading charges and is cooperating with the government, testified last year at the trial of former Galleon portfolio manager Zvi Goffer, his brother Emanuel Goffer and Michael Kimelman. All three were convicted of insider trading.
Cardillo is scheduled to continue his testimony May 29 when the trial resumes.
At a hearing outside the jury’s presence at the end of court yesterday, prosecutors said they might conclude their case by the end of next week after calling eight or nine more witnesses. The trial began May 21.
In listing his probable witnesses, Assistant U.S. Attorney Reed Brodsky didn’t name Goldman Sachs Chief Executive Officer Lloyd Blankfein, who testified as a government witness at Rajaratnam’s insider-trading trial last year. The fund manager was convicted and is serving an 11-year prison term.
One government witness may be former Galleon trader Adam Smith, who pleaded guilty to insider trading and is cooperating with prosecutors. Smith might testify about his and Rajaratnam’s relationship with Goldman Sachs Managing Director David Loeb, Brodsky said. Loeb hasn’t been accused of any wrongdoing.
Gupta’s lawyer, Gary Naftalis, has argued his client is innocent and that the government has “the wrong man on trial.” In hearings outside the jury’s presence, Naftalis has suggested Loeb was the source of Rajaratnam’s tips.
Brodsky confirmed at a May 23 conference with the judge that the government had evidence that Loeb tipped Rajaratnam about technology stocks, including Intel Corp. (INTC:US), Apple Inc. (AAPL:US) and Hewlett-Packard Co. (HPQ:US) Brodsky said there was no evidence that Loeb provided Rajaratnam tips about the stocks at issue in this case.
“The defense has made much of -- there is a lot of dust around the name David Loeb and there is certainly a lot of statements from the defense about David Loeb and putting on a Loeb defense,” Brodsky told the judge.
Brodsky said prosecutors hadn’t decided whether they would call Smith as a witness and explained to Rakoff that the portfolio manager had direct dealings with Loeb and could rebut any defense assertions that Loeb had provided information.
“Mr. Smith had direct communications with Mr. Loeb, prior to Mr. Rajaratnam having any communications with Mr. Loeb,” Brodsky said. “It was Mr. Smith who was the primary communicator with Mr. Loeb for most of the people at Galleon.”
Naftalis said prosecutors could call Smith, saying, “Adam Smith is somebody who doesn’t have any material evidence to give against us. He’s not a co-conspirator of ours. We have nothing to do with Adam Smith.”
Naftalis declined to comment after court yesterday. Michael DuVally, a spokesman for Goldman Sachs, declined to comment on the prosecutor’s statements about Loeb.
The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).
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