Prosecution quizzes key Rajaratnam defense witness

By Grant McCool

NEW YORK (Reuters) - A key defense witness in Raj Rajaratnam's insider trading trial was pressed by a prosecutor about whether cheating and corruption were accepted practices at hedge funds.

In cross-examination in Manhattan federal court, former Galleon Group chief operating officer Rick Schutte had a tense exchange with prosecutor Reed Brodsky on Wednesday.

Investors "didn't want hedge fund managers corrupting executives at companies do they?" Brodsky asked him.

"I don't think that's a business plan that I would put forth if that's what you are asking," said Schutte, who was hired by Galleon in June 2004 after years as a computer hardware and storage analyst at Goldman Sachs Group Inc.

Through Schutte's testimony over the last three days, the defense has sought to underpin evidence it presented to the New York jury in an effort to show that Rajaratnam did not break the law.

The jury previously heard five weeks of government evidence, including FBI phone taps. Prosecutors say Rajaratnam, Galleon's founder, got illicit stock tips from highly-placed corporate sources to make $63.8 million from 2003 until March 2009.

Sri Lankan-born Rajaratnam is the central figure in what federal prosecutors have described as the biggest probe of insider trading at hedge funds on record.

Separately on Wednesday, the Manhattan U.S. Attorney's Office and the U.S. Securities and Exchange Commission announced charges in another insider trading investigation involving a former FrontPoint Partners LLC hedge fund manager.

Schutte testified that Rajaratnam and others at Galleon made trading decisions on volumes of research and analysis.

"It seems like a lot of data but we received much more than this," Schutte said under questioning from a defense lawyer, Michael Starr, who introduced scores of analyst reports, emails and stock charts during the testimony.

"I'm not saying they (Galleon analysts) read everything, but there is a lot of input," Schutte said.

Rajaratnam is charged with 14 counts of conspiracy and securities fraud surrounding trades on Google Inc, Advanced Micro Devices Inc, Intel Corp and other stocks. He faces up to 20 years in prison if convicted on the most serious charge of securities fraud.

The trial began on March 8 and could finish by the end of April.

Goldman Sachs is one of the stocks cited in the indictment against Rajaratnam. Lloyd Blankfein, Goldman's chief executive, testified for the government on March 23. He said former Goldman director Rajat Gupta violated the investment bank's confidentiality rules by leaking boardroom secrets to Rajaratnam in 2008.

The case is USA v Raj Rajaratnam et al, U.S. District Court for the Southern District of New York, No. 09-01184.

(Reporting by Grant McCool, editing by Dave Zimmerman)