Rajaratnam invests in fund run by trial witness

Hedge fund founder Raj Rajaratnam and his family have invested USD 25 million in a USD 35 million fund managed by one of his former top executives who is testifying at Rajaratnam's insider trading trial, the jury heard on Thursday.

An acknowledgment by the former Galleon Group executive, Rick Schutte, that Rajaratnam was the biggest investor in a fund started by Schutte appeared to take the defense by surprise, providing one of the more dramatic moments of the trial so far. Sri Lankan-born Rajaratnam, 53, is the central figure in what prosecutors have described as the biggest probe of insider trading at hedge funds on record. The trial in Manhattan federal court is in its sixth week and is expected to last until the end of April. Under cross-examination, Schutte was asked by prosecutor Reed Brodsky about Spottail Capital Advisers LLC, the fund he began in July 2010 about eight months after Rajaratnam's October 2009 arrest. Schutte acknowledged that Rajaratnam was one of the investors in the fund, which has USD 35 million under management. "He is the biggest investor?" Brodsky asked, to which Schutte responded: "That is fair to say." Brodsky pointed out to Schutte and the jury that Rajaratnam invested USD 10 million in Spottail last September and his family invested an additional USD 15 million on January 4. "Eight weeks before the start of this trial Raj Rajaratnam's family put USD 15 million into the Spottail fund," Brodsky said in a cross-examination intended to undermine the credibility of a key defense witness. "That is correct," Schutte testified. Schutte stood to earn an annual fee of USD 500,000 for managing the total investment of USD 25 million, Brodsky noted. When Schutte was later asked by a defense lawyer, Michael Starr, whether Rajaratnam had ever offered him anything in exchange for testifying, Schutte said: "Absolutely not." Rajaratnam is charged with conspiracy and securities fraud and could be sentenced to up to 20 years in prison if convicted. The defense is presenting its side of the case this week. The jury previously heard five weeks of government evidence, including dozens of FBI phone taps, and former friends who testified against the hedge fund founder. The government contends Rajaratnam made an illicit USD 63.8 million in dozens of stocks, mostly technology companies, between 2003 and March 2009. The case is USA v Raj Rajaratnam et al, U.S. District Court for the Southern District of New York, No. 09-01184.