Morgan Stanley will be on the witness stand today in the Galleon Insider Trial that last week featured Goldman Sachs CEO Lloyd Blankfein.  However, Morgan Stanley will not be physically present. 

No, it is Adam Smith, a former portfolio manager at the Galleon Group, the hedge fund Raj Rajaratnam ran.  He's expected to tell the jury that he obtained illegal tips about merger deals from a Morgan Stanley investment banker.  Then, he's likely to say that he and Mr. Rajaratnam profited substantially by trading on the information.

Mr. Smith pleaded guilty in January to insider trading and, obviously, is a cooperating witness.  He'll be the first former Galleon employee to testify in this trial - which begins Week 4 and is expected to describe the culture inside Galleon - a large and powerful hedge fund, until Mr. Rajaratnam was arrested in October 2009.  Galleon principally focused on technology stocks, employing the so-called mosaic theory of stock investing that relies on analysts to ferret out data about companies by aggressively pressing sources for information to build a mosaic about those companies and gain an investment edge.  Mr. Smith, in effect, has admitted that pieces of his mosaics came from illegal stock tips.

A graduate of Harvard College and Harvard Business School, Mr. Smith, 38, was an investment banker in Morgan Stanley’s Silicon Valley office before joining Galleon in 2003. Galleon was a perfect fit for Mr. Smith, who specialized in the technology industry and preferred the fast-moving trading culture of a hedge fund to the slower-paced world of investment banking.

A popular figure on the trading floor with a keen sense of humor, Mr. Smith thrived at Galleon, which at its height managed $7 billion. Mr. Rajaratnam took to Mr. Smith early on and gave him his own pool of money to manage, according to two people who had been close to him and would speak only on the condition of anonymity. At his peak, Mr. Smith controlled about $250 million.

In his best years, he earned several million dollars annually. He was among the firm’s hardest workers, taking frequent trips to Asia to visit sources and production facilities.

Mr. Smith has also admitted to obtaining the confidential financial results of two technology companies — the Intersil Corporation and Nvidia — from employees at those companies and then trading on the information in advance of their quarterly earnings announcements.

His relationship with a former Morgan Stanley colleague, Kamal Ahmed, is expected to be a focus of his testimony. Mr. Ahmed is a Morgan Stanley managing director who is said to have provided Mr. Smith with information about pending deals, including Integrated Device Technology’s acquisition of Integrated Circuit Systems in 2005 and Advanced Micro Devices’ purchase of ATI Technologies the next year.

Earlier in the trial, the government played a secretly recorded telephone call from 2008 in which Mr. Smith can be heard telling Mr. Rajaratnam about a potential sale involving Vishay Intertechnology. Mr. Smith says, “Listen, ah, I talked to Kamal last night” and explains that Morgan Stanley had tried to win the assignment to sell Vishay but that another bank “got the mandate.” He then says that he is going to buy some Vishay stock.

On the call, Mr. Rajaratnam asks Mr. Smith how the market is treating him and Mr. Smith responds: “Like a baby treats a diaper.”

Morgan Stanley has placed Mr. Ahmed on administrative leave. Doug Tween, a lawyer for Mr. Ahmed, said his client was cooperating and “we remain confident that he did nothing illegal or improper.”

Mr. Rajaratnam’s lawyers are expected to portray Mr. Smith as untrustworthy and to argue that he is testifying in return for a lenient prison sentence.

Just weeks before the trial began, prosecutors also tried to use Mr. Smith to gather information on Ian Horowitz, Mr. Rajaratnam’s personal trader at Galleon. On Jan. 14, after he began cooperating with the government, Mr. Smith made three secretly recorded calls to Mr. Horowitz in which he tried to elicit evidence of insider trading.

At the end of the third call, Mr. Horowitz, who has not been charged with any wrongdoing, said to Mr. Smith: “The questions you are asking me are like you are tapping me on the phone trying to get me to say some things.”

“Are you serious?” Mr. Smith said, denying that he was recording their call. “Dude, come on.”   [NYT Dealbook, 3/28]