A Wall Street hedge fund manager accused in the biggest insider stock trading case in history bragged in a 2008 conference call about making a massive illegal trade only moments before the market closed and in another call about being tipped by a Goldman Sachs board member that the company would lose money, according to prosecutors who played tapes of the calls Wednesday at his trial.
Speaking to three of his employees in one call, Galleon Group founder Raj Rajaratnam called it a "big drama" — one that prosecutors say began with an inside tip from a Goldman Sachs board member right after the board agreed to accept a blockbuster offer from Warren Buffet to pump $5 billion into the struggling investment bank.
"I got a call at 3:58, right?" Rajaratnam says on the tape heard by a Manhattan jury. "Saying something good might happen to Goldman, right?"
Immediately after getting the tip, Rajaratnam called in an order for $43 million in Goldman stock, prosecutors said.
The order was so large that brokers could only complete $27 million in trades for Rajaratnam. But the next day, after news of the deal was made public, his stake in Goldman rose enough to make him a cool $1 million, prosecutors say.
In another call to a Galleon employee overseas, Rajaratnam is heard bragging that he was tipped that Goldman would announce the first loss in its history since going public in 1999.
"Um, now I, I heard yesterday from somebody who's on the board of Goldman Sachs that they are gonna lose $2 per share. The street has them making $2.50," he is heard saying. "So what he was telling me was that, uh, Goldman, the quarter's pretty bad. They have zero revenues because their trading revenues are offset by asset losses."
The government says both calls occurred in 2008 in the midst of the financial crisis after Rajaratnam spoke with Rajat Gupta, a former Goldman Sachs board member who has not been charged criminally and has denied any wrongdoing but faces civil charges brought by the Securities and Exchange Commission.
The defense has argued that the founder of the now-defunct Galleon family of hedge funds only traded using legitimate analysis and research.
Rajaratnam's lawyer, John Dowd, has said his client had the best research in the business and didn't need to trade illegally.
The government has said Rajaratnam, who was born in Sri Lanka, earned more than $50 million illegally by trading on inside information since 2003. He has pleaded not guilty to conspiracy and security fraud charges.
The investigation, which relied on extensive use of wiretaps, has resulted in more than two dozen arrests. Already, 19 of those arrested have pleaded guilty, and many are cooperating with prosecutors.
One of the cooperators, former Galleon manager Adam Smith, testified earlier Wednesday that Rajaratnam coached his underlings on how to disguise illegal trades by buying and selling a lot of stock before major announcements about earnings or mergers.
"If the government or anybody asked why we had a big position in stock, we'd say, 'Look at the buys and sells before it happened. Clearly, we didn't know what was going to happen,'" Smith testified.
Smith said Rajaratnam had told him the tactic "was a good idea, that he did it."
"I was scared," he said.
He was asked: "You thought the best way to help yourself was to turn on Raj Rajaratnam?"
"No, that's not correct," he responded. "I signed a cooperation agreement."
Smith, the only former Galleon employee to testify so far, was to return to the witness stand Thursday.