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Securities and Exchange Commission v. Galleon Management, LP et al Doc. 196 Att. 1 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK SECURITIES AND EXCHANGE COMMISSION, Plaintiff, No. 09-CV-8811-JSR ECF CASE v. GALLEON MANAGEMENT, LP, et al., Defendants. EXPERT REPORT of GREGG A. JARRELL* April 29, 2011 * William E. Simon Graduate School of Business Administration, University of Rochester, Rochester, NY 14627 Dockets.Justia.com TABLE OF CONTENTS I. INTRODUCTION AND SUMMARY OF OPINIONS .......................................................... 1 II. QUALIFICATIONS AND COMPENSATION .................................................................... 2 III. MATERIALS REVIEWED .................................................................................................. 4 IV. BACKGROUND ..................................................................................................................... 4 A. GALLEON .................................................................................................................... 4 B. THE INSIDER TRADING ALLEGATIONS ........................................................... 5 V. ANALYSES AND OPINIONS ................................................................................................ 6 A. OVERVIEW OF RAJARATNAM’S TRADING ..................................................... 6 B. MIX OF INFORMATION IN THE MARKET AND WITHIN GALLEON ......... 8 i. Event Study Evidence ........................................................................................ 8 ii. Consensus Driven Market Prices .................................................................. 10 iii. The Mosaic Theory ........................................................................................ 16 iv. Economic Perspective on Insider Trading ................................................... 18 v. Akamai – Q2’08 Earnings .............................................................................. 20 vi. Google – Q2’07 Earnings .............................................................................. 30 vii. Intel – Q4’06 Earnings ................................................................................. 43 viii. Intel – Q1’07 Earnings ................................................................................ 52 ix. Intel – Q3’07 Earnings .................................................................................. 64 x. Polycom – Q4’05 Earnings ............................................................................. 72 xi. Polycom – Q1’06 Earnings ............................................................................ 81 xii. ATI – Takeover ............................................................................................. 87 xiii. Hilton – Takeover ...................................................................................... 106 xiv. PeopleSupport – Takeover ........................................................................ 119 xv. AMD – Joint Venture ................................................................................. 125 xvi. Clearwire – Joint Venture ......................................................................... 136 xvii. eBay – Workforce Reduction ................................................................... 156 I. INTRODUCTION AND SUMMARY OF OPINIONS 1. As described in greater detail in the next Section of this report, I am a tenured Professor of Economics and Finance at the University of Rochester’s William E. Simon Graduate School of Business Administration and a former Chief Economist for the United States Securities and Exchange Commission (“SEC”). I have been retained by Akin Gump Strauss Hauer & Feld LLP, counsel to defendant Raj Rajaratnam (“Mr. Rajaratnam”), to opine on the mix of information available in the marketplace and within Galleon Management, L.P. (“Galleon”) relating to the SEC’s allegations of insider trading by Mr. Rajaratnam in the following ten securities: (i) Advanced Micro Devices, Inc. (“AMD”); (ii) Akamai Technologies, Inc. (“Akamai”); (iii) ATI Technologies Inc. (“ATI”); (iv) Clearwire Corporation (“Clearwire”); (v) eBay Inc. (“eBay”); (vi) Google, Inc. (“Google”); (vii) Hilton Hotels Corporaation (“Hilton”); (viii) Intel Corporation (“Intel”); (ix) PeopleSupport, Inc. (“PeopleSupport”); and (x) Polycom, Inc. (“Polycom”) (collectively referred to as the “SEC Selected Companies”). I have also been asked to opine on Mr. Rajaratnam’s transactions in these securities. 2. I offer several opinions in this report. Dettailed explanations and the bases for these opinions are provided in the sections that follow. I opine that: i) A substantial level of discussion by Wall Street analysts and the financial press about each of the ten SEC Selected Companies was publicly- available before those companies aannounced certain corporate information; ii) Based on my understanding of the information the SEC is alleging was conveyed in each tip, it is my opinion that the information allegedly tipped to Mr. Rajaratnam was not private information, but rather was substantially similar to information that was already included in the mix of publicly available information; and iii) It would be reasonable for a well-informed, professional innvestor (such as a hedge fund manager) to trade in the shares of each of the ten SEC Selected Companies as I indicate below in this report. 1 3. I understand that discovery in this case is ongoing and has not yet been completed. Therefore, I reserve the right to amend this report in light of the ongoing discovery process. II. QUALIFICATIONS AND COMPENSATION 4. I am currently a tenured Professor of Economics and Finance at the University of Rochester’s William E. Simon Graduate School of Business Administration, where I have been a member of the faculty since 1988. I hold a Ph.D. in Business Economics from the University of Chicago (1978), with major concentrations in Industrial Organization and Finance, as well as an MBA (1976) from the University of Chicago. I received a B.S. in Business Administration from the University of Delaware (1974). I attended high school at New York Military Academy (1967-70). 5. From 1977 to 1981, I was an Assistant Professor of Economics at the Graduate School of Management at the University of Rochester. From 1981 to 1983, I was a Post- Doctoral Research Fellow at the University of Chicago’s Center for the Study of the Economy and the State. Thereafter, from 1983 to 1984, I was a Senior Economist with Lexecon, Inc., a Chicago-based economics consulting firm specializing in antitrust and securities litigation. I also served as an expert in mergers and acquisitions on the 1983 SEC Advisory Committee on Tender Offer Policy. 6. From 1984 through 1987, I was the Chief Economist for the SEC in Washington, D.C. I also served as an Adjunct Professor at the Georgetown University Law School in Washington, D.C. during 1985 and 1986, where I co-taught a course on securities regulation. After leaving Washington, D.C. in 1987, I was the AT&T Foundation Resident Management Fellow at the University of Rochester’s Simon School. From 1987 to 1988, I was the Senior 2 Vice President and Director of Research at the Alcar Group, Inc., a Chicago-based management consulting and software firm specializing in financial valuations of businesses and securities. 7. Since joining the Simon School faculty at the University of Rochester as a tenured professor, I have served (from 1988 to 1990) as director of the school’s Managerial Economics Research Center. I also served as director of the Bradley Policy Research Center at the Simon School from 1990 to 1994. While at the Simon School, I have taught a course titled “Cases in Finance” to second-year MBA students that covers, among other subjects, the operation of financial markets and the market for corporate control, the economics of mergers and acquisitions, valuation analysis for businesses and securities, the response of stock prices to public information, and financial regulation of securities markets. I also teach a price theory course called Managerial Economics that includes applications of intra-company pricing of transfers of products and services. I have received eleven Superior Teaching Awards. I have authored or co-authored more than two dozen articles and studies in scholarly journals generally on the topics of mergers and acquisitions, the regulation of financial markets, and the response of stock prices to the release of information, among other things. My curriculum vitae, with a list of publications and of recent cases in which I have testified as an expert at deposition or trial, is attached as Exhibit 1. 8. My compensation, which is not contingent upon the outcome of this matter, is based on the number of hours worked on this assignment, as well as reimbursement of out-of- pocket expenses. My hourly rate is $600. To assist me in this assignment, I have worked with Forensic Economics, Inc., whose employees acted under my supervision and direction for this assignment. Forensic Economics, Inc., located in Rochester, New York, was founded in 1989. 3 The hourly rates of the employees of Forensic Economics who worked on this assignment range from $145 to $475. III. MATERIALS REVIEWED 9. In the course of my assignment in this case, I (or employees of Forensic Economics acting under my supervision) have reviewed numerous documents, including: the Second Amended Complaint dated January 29, 2010 (the “Complaint”); the Criminal Complaint dated October 15, 2009 (the “Criminal Complaint”);

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