A former business schoolmate of a one-time billionaire hedge fund boss took a starring role Thursday at an insider trading trial, testifying that he agreed to accept $500,000 annually eight years ago to reveal secrets about public companies to his longtime friend.
Anil Kumar, 52, of Saratoga, Calif., testified for the prosecution at the trial of Raj Rajaratnam, supporting government claims that Rajaratnam was on the prowl for an edge in the trading of stocks for his hedge funds and was willing to break the law to get it.
Kumar, who worked for McKinsey & Co. for more than 23 years before his October 2009 arrest, pleaded guilty to securities fraud charges last year and testified in the hopes of leniency at sentencing.
Prosecutors say Rajaratnam earned at least $24.5 million from Kumar's tips, including more than $20 million from a single tip in 2006.
The trial of Rajaratnam, 53, of Manhattan, began Tuesday. He is the only one of more than two dozen people charged in the insider trading crackdown to face trial. Nineteen have pleaded guilty. The investigation also has led to another probe that targets those who pose as researchers in the securities industry as they pass secrets about public companies to hedge funds.
The government has said Rajaratnam earned more than $50 million illegally by trading on inside information since 2003. He has pleaded not guilty to conspiracy and security fraud charges. His lawyer, John Dowd, said during opening statements Wednesday that his client had the best research in the business and did not need to trade illegally.
Prosecutors have said the investigation of Rajaratnam and others was the biggest hedge fund insider trading case in history.
Kumar said he was not close to Rajaratnam when they both attended the University of Pennsylvania's Wharton School in the early 1980s. After school, he said, Rajaratnam became a technology analyst and they became acquainted as business friends.
"I found Mr. Rajaratnam to be quite an insightful person on technology," he said.
Kumar said he began meeting with Rajaratnam as many as four times a year after Kumar returned in 1999 from a six-year stint in India, where he was born. He said they were both living in California at the time and that Rajaratnam had become quite successful after opening Galleon Group LLC, a family of hedge funds that shut down after his arrest.
Kumar, a U.S. citizen, said Rajaratnam told him in 2002 that he receives $100 million annually to spend on research and was interested in obtaining consulting services. When Kumar tried to arrange a deal through his company, Rajaratnam pulled him aside as both men were walking outside after a charity event ended.
"He said, `What I really want is your input and I'd much rather have you as a consultant than McKinsey,'" Kumar recalled.
When Kumar said he was not allowed to arrange side deals, Rajaratnam suggested annual payments of $500,000 be put in an overseas account, with some of it eventually being reinvested with Galleon, Kumar testified.
Kumar said he agreed to the deal after further discussions. He said Rajaratnam told him: "You work very, very hard. You're underpaid. ... Just keep track of your knowledge and share it with me, good knowledge that's worth a lot of money."
After the deal was finalized, Rajaratnam got more specific with his demands, taking a particular interest in Advanced Micro Devices Inc., a chip-maker that was battling Intel Corp. for domination of the microchip market.
"Mr. Rajaratnam was asking me a lot about AMD," Kumar said. "He asked for information on revenues, sales and profits. He was always particularly interested in what the company was going to say about the future."
Kumar said he kept Rajaratnam apprised in 2003 about AMD's efforts to sell a new chip to computer makers, an effort so secret that the company referred to it by the code name "Maid" when it spoke of it.
When Hewlett-Packard Co. agreed to place an order worth hundreds of millions of dollars, Kumar told Rajaratnam a month before the deal was announced publicly, he testified.
Before Kumar testified, prosecutors played several phone calls involving Rajaratnam for the jury. The government has said the case marked the first time wiretaps played such an important role in a white-collar probe.
The trial is scheduled to resume Monday.