Kumar Pleads Guilty in Galleon Case, Admits Accepting Cash

Date: Friday, January 8, 2010
Author: David Glovin, Bloomberg

Anil Kumar, a former McKinsey & Co. director, told a judge he leaked inside information to Galleon Group LLC founder Raj Rajaratnam over five years in return for $1.75 million.

Kumar yesterday became the seventh person to plead guilty in the wide-ranging insider-trading case as he implicated Rajaratnam in the scheme. He also agreed to testify against the hedge fund founder in a bid for leniency.

“Anil, you’re a hero,” Rajaratnam told Kumar after Galleon earned $19 million by trading on secret tips about Advanced Micro Devices Inc.’s acquisition of ATI Technologies Inc. in 2006, according to Assistant U.S. Attorney Jonathan Streeter, who outlined the charges in Manhattan federal court.

Kumar’s cooperation strengthens the U.S. case against Rajaratnam, the Sri Lankan-born founder of Galleon who was indicted last month on charges that he earned $17 million through inside stock tips from corporate officials and hedge fund executives. The government this week alleged that Rajaratnam made another $19 million in the AMD deal.

Among those who have pleaded guilty and agreed to testify against Rajaratnam are former Intel Corp. executive Roomy Khan and at least one other person who prosecutors didn’t name in a November court filing. The government’s case is also based on taped recordings of his phone conversations.

Rajaratnam, who is free on $100 million bail, has pleaded innocent. He is scheduled to appear in court on Jan. 12 in a bid to get his bail reduced.

“Raj Rajaratnam did not make payments to Mr. Kumar or anyone else in return for providing inside information,” defense attorney John Dowd said in a statement yesterday.

AMD

In its civil lawsuit against Kumar, the U.S. Securities and Exchange Commission said Kumar was a friend of Rajaratnam’s and a direct or indirect investor in at least one Galleon fund. In court yesterday, Kumar said Rajaratnam approached him in late 2003 or early 2004 and offered to pay him $500,000 annually in exchange for tips about McKinsey clients.

“I understood Mr. Rajaratnam was going to trade securities,” Kumar said in court.

Kumar said “numerous” leaks occurred from 2004 to 2009, including one about the AMD-ATI transaction. Streeter said Rajaratnam routed payments to Kumar, including $1 million after the AMD deal, to a Swiss account. A portion of his payoffs was reinvested in Galleon funds in the name of Kumar’s household help so that Kumar earned about $2.6 million from the scheme, Streeter said.

Media Reports

In court, Kumar appeared to cry and paused for half a minute as he apologized to the colleagues he said he “betrayed.”

Kumar “is pained by the fact that he has embarrassed and let down his colleagues at McKinsey,” his lawyer, Robert Morvillo, said in a statement yesterday. Kumar pleaded guilty to conspiracy and securities fraud and faces a maximum 25 years in prison.

On Jan. 5, seven days after Kumar agreed to plead guilty, prosecutors said in a court filing that they planned to expand the charges against Rajaratnam to include allegations that he and Galleon earned $19 million by trading on secret tips he got about AMD’s acquisition of ATI.

Dowd said after those allegations became public that “an analyst’s prediction that AMD would acquire ATI was widely reported in the press more than seven weeks before the acquisition was announced.” Yesterday, Streeter said Kumar’s tips occurred “before there were any press reports.”

Money Laundering?

Paying money to Kumar through a secret Swiss account may subject Rajaratnam to a charge of money laundering, said Daniel Richman, a professor at Columbia Law School in New York and an ex-federal prosecutor. A laundering conviction may subject him to more time in prison, Richman said, adding that judges have wide latitude at sentencing. In his plea agreement, Kumar agreed to disclose his violations of laundering laws.

“It’s going to be on the table as a potential charge,” Richman said in an interview.

The criminal information that Kumar pleaded guilty to lists other Kumar tips, including one about AMD’s plan to spin off its manufacturing operations to an Abu Dhabi-based entity. Galleon funds didn’t profit after AMD stock rose on the news because of a broad market decline in late 2008, the information says. A third tip involved eBay Inc.’s plan to lay off workers, it says.

Another AMD source has also been implicated in the case. An AMD executive who isn’t named in the criminal complaint allegedly told another defendant, New Castle Funds LLC executive Danielle Chiesi, about a pending spinoff. That person is Hector Ruiz, AMD’s former chief executive officer, according to a person familiar with the investigation.

Tapes

Ruiz stepped down as CEO of AMD, the world’s second-largest maker of personal-computer processors, in 2008. Jeremy Fielding, a spokesman for Ruiz, has declined to comment.

Also yesterday, Dowd filed a letter urging a judge to reduce Rajaratnam’s $100 million bail to $20 million. He said that the government’s case is not as strong as prosecutors allege.

The tapes “do not, as claimed, catch Mr. Rajaratnam ‘in the act’ of insider trading,” Dowd wrote. “For the most part, the hundreds of hours of recorded intercepts reflect the wholly unremarkable fact that stock traders and portfolio managers frequently talk to one another about stocks.”

In all, 21 people have been charged in two overlapping cases. Only Rajaratnam and Chiesi have been formally indicted. The cases against the others have been postponed as defense lawyers review evidence and engage in negotiations with prosecutors.

Cooperators

Others who have pleaded guilty and are cooperating with the U.S. probe include Richard Choo-Beng Lee, the co-founder of Spherix Capital LLC, and Ali Far, who worked as an analyst and portfolio manager at Galleon and Spherix.

Also pleading guilty are Steven Fortuna, the co-founder of S2 Capital Management LP, who is accused of tipping Chiesi, and two men in a related insider-trading case, Gautham Shankar, a former trader at New York-based Schottenfeld Group LLC, and Brien Santarlas, a former lawyer at Ropes & Gray LLP.

The case is U.S. v. Rajaratnam, 09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: David Glovin in New York federal court at glovin@bloomberg.net.