Former Galleon Trader Smith Gets Probation in Insider-Trading Case

A former Galleon Group hedge fund portfolio manager-turned-government informant was sentenced Tuesday to two years probation for his role in an insider trading ring that’s already netted nearly 70 defendants.

Adam Smith pleaded guilty to one count of securities fraud and one count of conspiracy. In a sentencing memo to the court, the government called Smith’s assistance “valuable” and named him as a “key” witness in the case against his boss Raj Rajaratnam.

Assistant U.S. Attorney Reed Brodsky says Smith gave them information on how Rajaratnam skirted regulators and avoided authorities. He also told them about  Rajaratnam’s trading codes, provided information on other Galleon employees, and is helping prosecutors "with several ongoing government investigations including an unidentified analyst working in Taiwan.”

Smith had also been prepped to testify against former Goldman Sachs (NYSE:GS) director Rajat Gupta but ended up not doing so after the judge ruled his testimony would be hearsay.

Smith was sentenced by U.S. District Judge Jed Rakoff in Manhattan. Rakoff is the same judge who will sentence Gupta in October on three counts of securities fraud and one count of conspiracy for leaking corporate secrets about Goldman and Procter & Gamble Co. (NYSE:PG) to Rajaratnam.

Gupta, who was convicted earlier this month, is the most prominent figure in the government’s wide-reaching investigation into the multi-billion dollar hedge fund industry.

Rakoff has openly questioned the government’s calculations for determining sentencing guidelines. Last September, the New York judge sentenced Winifred Jiau, a former Primary Global Research LLC consultant, to four years for swapping illegal tips for money and gifts. Federal sentencing guidelines, which Rakoff isn’t required to follow, called for a 10-year prison term.

Jiau was convicted in June 2011 of securities fraud and conspiring with hedge funds to gain an illegal market advantage. Her trial was the first involving an expert network firm. While Rakoff has said that insider trading, “strikes at the integrity of the marketplace, which is a very important asset of the United States,” he has criticized the guidelines as, "the mirage of something that can be obtained with arithmetic certainty.”

In July 2009, Rakoff sentenced Park Avenue lawyer Marc Dreier to 20 years for defrauding clients and investors of more than $400 million.

Prosecutors had asked for a 145-year-sentence, just five fewer than Ponzi schemer Bernard Madoff received a month earlier.

“He (Dreier) is not going to get much sympathy from this court, but he is no Mr. Madoff under any analysis, and that’s why I can’t understand why the government is asking for 145 years,” Rakoff ruled.