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Adam Smith, a former Galleon Group LLC portfolio manager described by prosecutors as a “key” cooperating witness against Raj Rajaratnam, was sentenced to two years’ probation and agreed to forfeit $105,300.
“I am deeply sorry for the mistakes I’ve made and I’m incredibly humbled and ashamed,” Smith said when he was sentenced yesterday in Manhattan federal court. “I apologize to those who I have caused pain and harm, to my wife, my friends and my family. I love my wife, my sons, my family and my friends.”
The sentence was imposed by U.S. District Judge Jed S. Rakoff, who also ordered Smith to pay a $15,000 fine.
“I hope this won’t be taken too cynically, but why is it that defendants always remember how much they love their families after they’ve committed the crimes that place that relationship in jeopardy?” Rakoff said.
In another case that is part of a five-year U.S. crackdown on insider trading at hedge funds, Tai Nguyen, 49, president of Insider Research LLC, pleaded guilty yesterday in the same courthouse to conspiracy to commit securities and wire fraud.
At a hearing before U.S. District Judge Naomi Reice Buchwald, Nguyen admitted that from 2006 to 2009 he was part of a scheme to trade on material nonpublic information on Abaxis Inc. (ABAX) a Union City, California-based medical products company. He also agreed to forfeit $3.9 million he earned in the scheme.
Nguyen, of Oregon City, Oregon, told the judge he passed the information to Samir Barai, founder of Barai Capital Management LP, and Noah Freeman, a former fund manager who at the time worked at Sonar Capital Management LLC. Both men have pleaded guilty.
“I agreed with others to violate and defraud the U.S. and took material nonpublic information from an insider and provide it to Sam Barai and Noah Freeman,” Nguyen said. “I know my conduct was illegal.”
Buchwald said Nguyen faces a term of 46 to 57 months in prison when he is sentenced on Nov. 8. She allowed him to remain free on a $500,000 bond.
Joe Dorame, a spokesman for Abaxis, didn’t return a voice- mail message seeking comment about Nguyen’s guilty plea.
The U.S. Securities and Exchange Commission filed a related lawsuit against Nguyen, saying he traded in advance of quarterly earnings reports on Abaxis -- including revenue, gross profit margins and earnings per share -- that he obtained from his brother, which allowed him to reap $147,000 in illicit profits.
Nguyen also was accused of passing the information to hedge fund clients of Insider Research, a California-based equity research firm, which the SEC said used the tips to make $7.2 million in illegal profits. The fund managers paid Nguyen more than $15,000 a month in consulting fees, U.S. Attorney Preet Bharara’s office said.
The SEC has sued 23 people stemming from its investigation of expert networking firms, which connect investors with employees of public companies and purportedly provide them with insight into specific markets.
More than 70 people have been criminally charged with insider trading by Bharara’s office since Rajaratnam, the co- founder of Galleon Group, was arrested in October 2009, prosecutors said. At least 64 people have either pleaded guilty or been convicted at trial, Bharara’s office said. Rajaratnam is serving an 11-year prison term after a jury convicted him last year.
Assistant U.S. Attorney Reed Brodsky, who prosecuted Rajaratnam, cited Smith’s “substantial” assistance to the government in prosecuting the hedge fund manager.
Smith, who testified at Rajaratnam’s trial, provided the government with critical information about how the fund manager concealed his insider-trading schemes by fabricating e-mails as false justification for trading in a particular stock, the prosecutor said.
Smith, who has a bachelor’s degree and a master’s degree in business administration from Harvard University, told jurors at Rajaratnam’s trial that he started working for Galleon as an analyst in about 2002 after leaving Morgan Stanley. (MS) He was promoted to portfolio manager and began trading on illegal inside information at Galleon as early as 2004, he testified.
Smith, who pleaded guilty in January 2011 to conspiracy and securities fraud, had faced as long as 20 years in prison, prosecutors said.
He was also prepared to testify for the government at the insider-trading trial of former Goldman Sachs Group Inc. (GS) director Rajat Gupta, Brodsky said. Gupta was convicted by a jury on June 15.
Gupta’s lawyers claimed there were other leakers at Goldman Sachs who provided tips to Galleon Group.
Smith would have told Gupta’s jurors that David Loeb, Goldman Sachs’s head of Asia equity sales in New York, “at no time” provided or discussed inside information about the bank with him, the government said.
Gupta’s lawyers sought to play for Gupta’s jury two phone calls secretly recorded by the Federal Bureau of Investigation between Rajaratnam and Loeb, as well as e-mails.
Rakoff, who presided over Gupta’s trial, rejected the defense request to present the Loeb evidence, ruling that the phone calls and e-mails were inadmissible hearsay.
Brodsky said Smith was the highest-ranking Galleon employee to plead guilty and had provided the government with Rajaratnam’s trading codes, as well as describing the conduct of other Galleon employees, he said.
Smith has continued to assist prosecutors, Brodsky said, and has provided “important assistance in connection with several ongoing government investigations into illegal insider trading,” including an unidentified analyst working in Taiwan.
The case is U.S. v. Adam Smith, 11-cr-00079, U.S. District Court, Southern District of New York (Manhattan).
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