Caught in Insider Trading Crackdown, Ex-Galleon Trader Turns It Around

Photo
Preet Bharara, United States attorney in Manhattan, called Adam Smith’s cooperation in the case against Raj Rajaratnam “substantial and significant.” Credit Todd Heisler/The New York Times

Adam Smith, a portfolio manager at the now-defunct hedge fund the Galleon Group, always seemed to have a Plan B.

Even after he pleaded guilty in 2011 to trading on corporate secrets, he was spared prison time because of his aid to prosecutors in their case against his onetime boss at Galleon, Raj Rajaratnam.

Last year, he was able to turn his brush with the law into a top job at an entrepreneurial venture called American Prison Data Systems.

The company, a public benefit corporation based in New York, was started in 2011 by Chris Grewe, an educator who co-founded and headed The Princeton Review in Japan in the late 1980s. Mr. Grewe’s company, whose investors include Vikram S. Pandit, former chief executive of Citigroup, aims to bring technology to the nation’s vast prison system by equipping each inmate with a security-hardened tablet. The device would serve as a platform to educate inmates, provide them with job training resources, enable them to communicate with staff members and potentially end the need for visitors to bring books, a possible storehouse for contraband, for inmates in prison.

Mr. Grewe said he brought Mr. Smith on board more than a year ago after a mutual friend recommended him as a bright, articulate role model for Mr. Grewe’s latest start-up.

“My business is predicated on giving people second chances,” Mr. Grewe said. “Hiring Adam seemed in keeping with our theme of rehabilitation.”

But in a recent interview, Mr. Grewe said that Mr. Smith, who held the title of chief operating officer, had left the company earlier this year. He declined to elaborate. Mr. Smith said he would not comment.

A friend said this week that Mr. Smith was not doing anything at the moment.

Mr. Smith’s quest to rebuild his life may have finally hit a wall. As Alan B. Vickery, a white-collar defense lawyer at Boies, Schiller & Flexner, explained, “Except in rare situations where a cooperator gets a nonprosecution agreement, the cooperator emerges as a felon and is also often further tainted as someone who cannot be trusted.”

In his brief time at American Prison Data Systems, Mr. Smith took an active public role in the company, accompanying Mr. Grewe at times to meetings to raise money from angel investors and speaking with the media about the company’s ambitions.

In an article on Forbes.com in June 2013, Mr. Smith said that he and his colleagues at American Prison Data Systems were considering branching out and starting a nonprofit group to provide tools like an open hub of legal information — statutes, for instance — that would enable inmates to prepare briefs.

“Prisons are one of the last places in the country not to have been touched by the digital revolution,” Mr. Smith told Forbes, which did not reveal his connection to the Galleon case. To underscore his point, Mr. Smith supplied Forbes with statistics that underpin American Prison Data Systems’ business model. Among them: Two-thirds of the prisoners in the United States do not have a high school diploma. People without a high school diploma have a more than 50 percent chance of ending up in the criminal justice system.

Of course, the compelling statistics did not apply to Mr. Smith, 42, a graduate of Harvard and Harvard Business School. After getting his M.B.A., he worked for three years at the Wall Street investment bank Morgan Stanley in New York and then Menlo Park, Calif., before joining the Galleon Group in 2002.

At his peak as a fast-rising portfolio manager at Galleon, Mr. Smith earned $2 million a year. He and his wife, Michele, own an apartment in Gramercy Park and a country house in upstate New York. The country estate was featured during Mr. Rajaratnam’s trial. On the morning after Mr. Rajaratnam’s arrest, Mr. Smith testified that he left his Manhattan apartment and drove to his home upstate where he dumped his laptop computer in the garbage, presumably to get rid of evidence that might incriminate him.

Mr. Smith’s ample pay at Galleon allowed him to dabble in interests outside  financial services. In 2008, after a friend invited him to invest in the musical “Rock of Ages,” Mr. Smith gathered some colleagues from Galleon and together they put money into the production, buying a 1 percent stake. “Rock of Ages” went on to be hugely successful, garnering five Tony award nominations.

Even in recent years, after his sentencing for insider trading led to diminished career opportunities, Mr. Smith never gave the impression that he was strapped. He earned about $200,000 a year at American Prison Data Systems, but he continued to send his children to private school, and a friend said that he saw Mr. Smith driving around Manhattan in a new Mercedes.

Mr. Smith, a favorite of Galleon’s founder, Mr. Rajaratnam, escaped arrest in October 2009 even though he had hit federal prosecutors’ radar when he was heard passing inside information on a wiretap of Mr. Rajaratnam’s cellphone.

But the prosecutors caught up with Mr. Smith again, not long after. Nine months after his boss’s arrest, Mr. Smith was heard on a wiretap recording receiving inside information on a shortfall in revenue at the technology company Nvidia from an analyst in Taiwan. Mr. Smith traded on the information at his start-up investment company, Rose Lane Capital, avoiding losses of $72,000.

But his investment gain was quickly overshadowed by the arrival of the F.B.I. In November 2010, shortly after he learned of the evidence that the government had amassed against him, he began to cooperate, offering prosecutors valuable information on the way Mr. Rajaratnam concealed his illegal trading and making recorded calls to eight people, including friends, over a two-week period at the behest of the government.

Preet Bharara, the United States attorney in Manhattan, described Mr. Smith’s cooperation as “nothing short of extensive, substantial and significant.” At sentencing, Mr. Smith was rewarded for it with a noncustodial sentence. It was one of the lightest sentences received by any Wall Street trader swept up in the government’s crackdown on insider trading in the hedge fund industry. He was barred from working in the securities industry, though.

After his sentencing, Mr. Smith took a job as the chief technology officer at an educational start-up, staying there until the company had a management buyout. After he was introduced to Mr. Grewe by a mutual friend and the two hit it off, he started exploring job possibilities at American Prison Data Systems.

In the last year, even as he has continued to meet with prosecutors to assist them on some outstanding cases, including the failed prosecution of Mr. Rajaratnam’s younger brother, Rengan, he has been trying to fashion a softer image for himself.

In 2013, he sent a 10-year anniversary card to his wife on the Internet. The card, which included a photo of them and their three children, recounted the story of their meeting. “Boy meets girl, girl thinks boy is cute, boy really thinks girl is cute” the card read. “Things happen (i.e. moves across the country) and romance ensues.”

The card concluded with “You make me very happy, Michele, I love you deeply.”

Anita Raghavan is the author of “The Billionaire’s Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund,” published by Business Plus.