MANHATTAN (CN) - Witness testimony against Raj Rajaratnam, the alleged ringleader of what prosecutors call the largest insider-trading scheme in history, continued Thursday afternoon with Anil Kumar, a one-time friend of Rajaratnam and former executive at the consulting firm McKinsey & Co.
Rajaratnam is accused of making $45 million on the scheme, which has resulted in guilty pleas from more than 15 alleged associates and tipsters, including Kumar.
Kumar was arrested for securities fraud and conspiracy on Oct. 16, 2009. He pleaded guilty on Jan. 7, 2010, and is testifying as part of a cooperation agreement with the government.
During opening arguments, defense attorney John Dowd said the government had cooperating witnesses "on a leash" with threats of seeking the maximum 25-year prison sentences for their admitted crimes.
On the stand, Kumar said that his cooperation agreement obligated him to be truthful, and that he has put the approximately $1.1 million that he earned from Rajaratnam in an escrow account for forfeiture when he is sentenced.
When they met at University of Pennsylvania's prestigious Wharton School in 1982, Rajaratnam was "between an acquaintance and a friend," Kumar said.
Kumar said Rajaratnam asked him to be his personal consultant after they met again in fall 2003 at a New York charity event.
According to Kumar's testimony, Rajaratnam proposed: "You just need to speak to me every four to six weeks, and I'll pay you half a million dollars."
Kumar said that he declined at first because private consultations violated his agreement with McKinsey, but Rajaratnam eventually convinced him by saying, "You're underpaid. ... You deserve more."
(Dowd attacked Kumar's credibility in opening statements by saying that he was "moonlighting" for Rajaratnam on his employer clock.)
Kumar also admitted to hiding his Rajaratnam-based earnings from the IRS. But he said that it was Rajaratnam who suggested hiding the money from McKinsey by putting it in an offshore account.
Rajaratnam made payments through Galleon Buccaneer's Offshore to Pecos Trading Corp., in Geneva, Switzerland, through Kumar's Indian housekeeper Manju Das, according to Kumar's testimony. Evidence showed the Bank of Bermada made the payment.
Rajaratnam then dictated the letter to Kumar for Das to sign over authority to Pecos, backdated to before Galleon's quarter began in October, Kumar said.
Kumar said that, once employed by Galleon Buccaneer's, he felt that Rajaratnam would "keep pressing me" to provide more information about his McKinsey clients' profitability, revenues and quarterly earnings.
"I thought that since he kept giving me the money, I had the obligation," Kumar said.
The first McKinsey client Rajaratnam sought inside information on was the computer-chip company Advanced Micro Devices, Kumar said.
Advanced Micro, an "arch-competitor" of Intel, was courting Dell and Hewlett Packard to use its chips in their computers between 2003 and 2004, Kumar said.
Kumar said he told Rajaratnam that the deal with HP looked promising about a month before the companies announced that they would "join forces" in a press release on Feb. 24, 2004.
By 2005, Advanced Micro wanted to "parachute out" of the dwindling memory-chip business so that it could concentrate exclusively on processors, Kumar said.
The company later prepared an initial public offering named Falcon "to suggest flying away," Kumar said.
Kumar said he told Rajaratnam about the strategy before the IPO was announced in April 2005.
Trial will resume with the continuation of the government's direct examination of Kumar on Monday.
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