By Reuters
Friday, January 08, 2010

Editor’s note: This version of the story recasts with implications of the plea and adds Mr. Rajaratnam denying making payments for inside information.
NEW YORK (Reuters)—Former McKinsey & Co. director Anil Kumar told a court on Thursday [Jan. 7] that Galleon hedge fund founder Raj Rajaratnam paid him $1.75 million in exchange for tips on clients of the consulting firm, giving prosecutors potentially more ammunition in the insider-trading case.

Mr. Kumar made the assertion as he pleaded guilty to fraud and conspiracy in Manhattan federal court. Prosecutors told how Mr. Kumar arranged to have an overseas entity receive payments from Mr. Rajaratnam through a Swiss bank account.

The money was then invested in Galleon under the name of a worker in Mr. Kumar’s household. Mr. Kumar made $2.6 million in illicit profits from this arrangement, including the $1.75 million paid by Mr. Rajaratnam, the prosecutors said.

Based on information from Mr. Kumar, the Galleon manager traded in Advanced Micro Devices Inc, in 2006 and 2008 and eBay Inc. in 2008, prosecutors said.

Mr. Rajaratnam’s lawyer, John Dowd, said in a statement that his client “did not make payments to Mr. Kumar or anyone else in return for providing inside information.”

Mr. Rajaratnam and Mr. Kumar met in the 1980s when they both attended the Wharton School of Business at the University of Pennsylvania.

Later a star at McKinsey, whose ranks have produced some of the best-known executives in corporate America, Mr. Kumar had been advising technology clients on business strategies, including potential acquisitions, since 1997.

Mr. Kumar, who is free on $5 million bail posted when he was arrested on Oct. 16, said in court on Thursday that he had conversations with Mr. Rajaratnam from 2003 to 2009. Some of those discussions were recorded in wiretaps by the FBI, tactics usually used in organized crime investigations.

“I understood Mr. Rajaratnam was going to trade securities. I understood that my conduct was unlawful,” Mr. Kumar told U.S. District Court Judge Denny Chin, pausing at times to compose himself.

He could face up to 25 years in prison when he is sentenced on March 26.

Trust Betrayed

Mr. Kumar said he was suffering from anxiety and depression and apologized to his colleagues at McKinsey, a company he worked from 1986 until he was let go in December.

“To all my colleagues whose trust I have betrayed, I am sorry,” said Mr. Kumar, of Saratoga, Calif.

When Mr. Kumar was arrested in October, the firm said it was “distressed.” On Thursday, a spokesman for McKinsey & Co. said it had “no further comment at this time.”

Mr. Kumar’s cooperation with prosecutors comes on top of former traders who have struck plea deals that may spell trouble for Mr. Rajaratnam’s defense.

The Sri Lankan-born Mr. Rajaratnam, a U.S. citizen, has pleaded not guilty and vowed to fight the charges and go to trial Previous Reuters Story. He is free on $100 million bail.

Twenty-one people, including employees of some of America’s biggest companies including IBM Corp. and Intel Corp. , have been criminally or civilly charged in the complex case involving at least two insider trading networks.

According to U.S. prosecutors and a civil complaint by the U.S. Securities and Exchange Commission, Mr. Kumar shared inside information in August 2008 about transactions involving Advanced Micro Devices and two Abu Dhabi entities with Mr. Rajaratnam, who then traded on the information.

On Oct. 7, 2008, AMD said it would spin off manufacturing operations through a multibillion dollar venture with the Advanced Technology Investment Co of Abu Dhabi. AMD stock opened 25% higher that day, resulting in millions of dollars of illegal profits for Mr. Rajaratnam, Mr. Kumar and others, prosecutors said.

Mr. Kumar also tipped the hedge fund manager over an acquisition of ATI Technologies Inc by AMD in 2006, prosecutors said in court on Thursday. In court papers, Mr. Rajaratnam’s lawyers have said information on that deal was public knowledge.

In October 2008, Mr. Kumar learned from an unidentified McKinsey client, a subsidiary of eBay Inc., that eBay planned layoffs and told Mr. Rajaratnam, the office of the Manhattan U.S. Attorney said in a statement. Galleon shorted eBay stock and then made about $500,000 after the layoffs were announced.

Rajaratnam Bail Hearing

On Tuesday [Jan. 5], prosecutors said they plan to file more charges against the 52-year-old Mr. Rajaratnam, saying he made $36 million in illegal profits from insider trading, more than double the amount previously alleged Previous Reuters Story.

A bail hearing is set for Jan. 12. The government wants to detain Mr. Rajaratnam, who has asked for his bail to be reduced to $20 million from $100 million.

In a court filing on Thursday, his lawyers called “far-fetched” and “preposterous” the government’s claim that he poses a serious risk of flight.

The cases are USA v Rajaratnam et al, case No. 09-01184, in U.S. District Court for the Southern District of New York; USA v Goffer et al, case No. 09-mj-02438, in the same court; and SEC v Galleon Management LP et al, case No. 09-cv-08811, in the same court.

By Grant McCool