By Grant McCool
NEW YORK (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
"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
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.
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
"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 October 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
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)
