Ex-McKinsey Consultant Says Rajaratnam Paid For Tips As First Tapes Are Played

Mar 11 2011 | 3:28pm ET

The jurors who will decide the fate of Galleon Group founder Raj Rajaratnam yesterday heard the first of the wiretaps at the heart of the insider-trading case against him as well as testimony from one of his alleged tipsters.

Anil Kumar, a business school friend of Rajaratnam's and former McKinsey & Co. director, said that Rajaratnam paid him $500,000 a year for non-public information about McKinsey clients.

Kumar, a cooperating witness who has pleaded guilty in the case, said that he had tried to recruit Galleon as a client for McKinsey. But Rajaratnam, who met Kumar at the University of Pennsylvania's Wharton School in the early 1980s, instead pushed to hire Kumar himself—in contravention of McKinsey rules.

"I'd much rather have you as a consultant, not McKinsey," Kumar said Rajaratnam told him. And Rajaratnam insisted on paying him, allegedly saying, "I know you will not remember to keep a list of ideas if you don't get money from me."

That money was paid to a friend of Kumar's with a Swiss bank account and then invested in Galleon's funds in the name of Kumar's housekeeper. And once it started flowing, Rajaratnam got demanding, Kumar said.

"Before 2004, did you ever give confidential information about McKinsey clients to Mr. Rajaratnam?" Assistant U.S. Attorney Jonathan Streeter asked Kumar.

"No," he replied.

"After 2004, did you do that?" Streeter asked, specifying the year after Rajaratnam began paying him as a consultant.

"Yes," Kumar said.

"Once I accepted the money he got quite specific about what a company's financial performance was," Kumar said. "He was asking me for a variety of information such as what is a company's profit, their revenue, how they are doing in that quarter, if they had strategic plans. He kept asking me. I didn't always know the answer but I felt that since I accepted the money, I had a sort of obligation to him."

Kumar said he passed several tips about Advanced Micro Devices on to Rajaratnam.

The jury also heard Kumar's voice on one of the wiretaps, telling Rajaratnam of an AMD transaction: "They've shaken hands. You can now just buy."

Asked by Rajaratnam if he should buy a million shares, Kumar responds, "You cannot go wrong. There will be such a boost from this announcement."

In addition to the Kumar tape, jurors also heard two other wiretaps during the testimony of Federal Bureau of Investigation Special Agent Diane Wehner, the prosecution's first witness. Wehner testified about how the tapes were made, and prosecutors played the clips with her on the stand.

One on tap, Rajaratnam is heard speaking with another cooperating witness, former Galleon trader Adam Smith. On the tape, from May 1, 2008, the two men are heard talking about a deal involving Vishay Intertechnology that never happened. On the second tape, Rajaratnam and Rajiv Goel, a former Intel Corp. employee who has pleaded guilty in the case, in Rajaratnam tells Goel that he knows about a deal involving PeopleSoft because "one of our guys is on the board."

Rajaratnam's lawyer, John Dowd, jumped on that tape, pointing out that the deal in question had been announced in a press release two months before the phone call. Dowd also highlighted a part of the Smith tape not played by prosecutors.

In that portion, Rajaratnam asks Smith, "How's the market treating you today?"

Smith responds, "Like a baby treats a diaper," eliciting a laugh from his boss.

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