May 30 (Bloomberg) -- A lawyer for former Procter & Gamble Co. director Rajat Gupta, who’s on trial for insider trading, cross-examined a government witness on whether Raj Rajaratnam and Galleon Group LLC traders “exaggerated” and “bragged” about having sources of inside information.
Gupta, who ran McKinsey & Co. from 1994 to 2003 and was a Goldman Sachs Group Inc. director, is accused of leaking tips about P&G and Goldman Sachs to Rajaratnam, the Galleon co- founder who was his friend and business partner.
Michael Cardillo, an ex-Galleon portfolio manager who pleaded guilty and is cooperating with prosecutors, testified last week before a jury in federal court in Manhattan that he traded on P&G stock in 2009 after learning that Rajaratnam had a “guy” on the company’s board.
In cross-examination today, Gupta’s lawyer, Gary Naftalis, asked Cardillo about Rajaratnam and other Galleon traders’ claims about their sources of illegal tips.
“Were there others at Galleon who claimed to have sources of inside information that they did not have?” Naftalis asked. After an objection by prosecutors, U.S. District Judge Jed S. Rakoff barred Cardillo from answering. The government alleges Gupta was the person on the P&G board.
“At morning meetings with Raj Rajaratnam, did people talk about or exaggerate their sources of inside information from time to time?” Naftalis asked.
“There were rare occasions when it happened,” Cardillo said.
Naftalis asked Cardillo if he’d ever heard Raj Rajaratnam, his brother R.K. Rajaratnam or other Galleon traders talk about sources of illegal tips about companies such as Kraft Foods Inc. or Chico’s FAS Inc.
Cardillo said he once witnessed the brothers discussing the possibility of Kraft’s acquiring the chocolate maker Cadbury Plc. R.K. Rajaratnam worked at Kraft before joining Galleon as a portfolio manager, Cardillo said.
“Raj had said to R.K., ‘You’ll get the heads-up if this is coming together. You’ll get the heads-up on that,’” Cardillo said. “I didn’t know if it was feasible or probable.”
“You were skeptical?” Naftalis asked Cardillo.
“Yes, I didn’t think he was ever going to get that information.”
Kraft didn’t make the acquisition until 2010.
Michael Mitchell, a Kraft spokesman, declined to comment immediately on the testimony.
Cardillo testified earlier that R.K. Rajaratnam, who ran a commodities fund at Galleon, told him to trade P&G stock in 2009 after learning that Raj Rajaratnam had a contact who was a P&G director.
“He told me he was hearing from Raj’s guy on the P&G board,” Cardillo told jurors during his direct testimony by the government.
Gupta, who pleaded not guilty, is charged with conspiracy and securities fraud, which carries a maximum 20-year prison sentence. The government alleges Gupta was the person on the P&G board who passed Rajaratnam the inside information and that his tips included leaks about P&G’s 2008 sale of its Folgers coffee unit to J.M. Smucker Co. and P&G earnings in January 2009.
Naftalis has argued to the jury that the government has the wrong man on trial and that Raj Rajaratnam “had sources all over town” for illegal tips.
Rajaratnam is serving an 11-year prison term for trading on inside information on a series of stocks, including Goldman Sachs, Intel Corp., Google Inc., ATI Technologies Inc. and Clearwire Corp.
Next page: Cardillo's plea
Cardillo pleaded guilty to one count of conspiracy and one count of securities fraud and hasn’t been sentenced, he testified.
He also said that beginning in late 2009, he agreed to wear a concealed recording device for the Federal Bureau of Investigation and record his former Galleon friends and colleagues.
Cardillo, who testified he received $50,000 in cash from Craig Drimal, another Galleon trader, for trading on inside information, paid more than $68,000 to settle a civil suit by the U.S. Securities and Exchange Commission, he said.
Drimal pleaded guilty and was sentenced to 5 1/2 years in prison.
Late today, prosecutors called an executive for a company that provided electronic swipe cards to Galleon offices. Rajaratnam’s assistant, Caryn Eisenberg, previously testified that her boss gave Gupta a electronic key card to enter Galleon offices.
Assistant U.S. Attorney Reed Brodsky showed jurors data about the card’s use, which indicates that on March 12, 2007, someone using the card assigned to Gupta swiped into Galleon’s Madison Avenue office at 11:36 a.m.
Brodsky also showed jurors Gupta’s calendar for that day, which showed that Gupta had scheduled a teleconference of the audit committee of Goldman Sachs Board of Directors in which “First Quarter Earnings Review” would be discussed from 11:30 a.m. to noon.
Gupta’s calendar also shows that he had a meeting from noon to 2:30 p.m. that same day for “NSR Partners Meeting, Location: Galleon Office.”
Prosecutors allege Gupta invested about $35 million in entities with Rajaratnam, including New Silk Route LLC and Voyager Capital Partners.
The government claims that Gupta was at Galleon’s offices when he listened to the Goldman Sachs call where the bank’s first quarter 2007 earnings were discussed. Prosecutors said Gupta then passed the information he’d learned about Goldman to Rajaratnam, who caused Galleon to buy 350,000 shares after audit committee meeting call ended, prosecutors said.
The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).
--With assistance from David Glovin and Bob Van Voris in New York. Editors: Charles Carter, Peter Blumberg