Anil Kumar, a former director at McKinsey & Co., said Raj Rajaratnam told him the value of his inside information to Galleon Group LLC was “diminished” because trader Danielle Chiesi's “intimate relationship” with the head of Advanced Micro Devices Inc. made her tips more valuable.
Kumar’s testimony yesterday in Rajaratnam’s insider trading trial in Manhattan federal court came as he described providing Rajaratnam with information about deals from 2004 to 2009 involving companies such as his client, AMD.
He told jurors that he tipped Rajaratnam about AMD’s 2008 plan to spin off a manufacturing entity for its microchips, and on investments from sovereign wealth companies including Abu Dhabi’s Mubadala Development Co. Kumar said Rajaratnam warned him his information was no longer as useful as it once was.
“He said there was someone on Wall Street that had an intimate relationship with my client, AMD, who was able to provide more information than I was,” Kumar testified, later identifying the individual as Chiesi. Andrew Merrill, a spokesman for former AMD Chief Executive Officer Hector Ruiz, denied such a relationship existed between Ruiz and Chiesi.
“Any suggestion that the relationship was intimate is untrue,” Merrill said yesterday.
Rajaratnam, 53, who has pleaded not guilty, is the central figure in the largest crackdown on hedge-fund insider trading in U.S. history. The Sri Lankan-born money manager is accused of making $45 million from confidential information leaked by corporate insiders and hedge fund traders.
Kumar, 52, told the jury that Rajaratnam warned him that Chiesi was also passing tips to others on Wall Street about the proposed deal. AMD, based in Sunnyvale, California, is the second-largest maker of processors for personal computers.
“He said she talks to a lot of people and people get to know about it and therefore it’s no longer private,” Kumar said. Rajaratnam suggested he warn Ruiz, “‘Stop doing this.’”
“I said, ‘Raj, you’ve got to be kidding, he’s a senior client, he’s older than me,’” Kumar said he responded. “I said I couldn’t do it, I couldn’t say, ‘I heard you were having a relationship with Danielle.’”
Kumar said Rajaratnam told him “‘your value to me is a little bit diminished because there’s now another source coming directly from the CEO.’”
Chiesi, 45, a stock trader at New Castle Funds LLC, pleaded guilty to insider-trading charges in January. Prosecutors said she traded on leaks from Robert Moffat, a former senior vice president at Armonk, New York-based International Business Machines Corp., who also pleaded guilty. Both the U.S. and Moffat have said Chiesi had an “intimate relationship” with the ex-IBM official. Moffat said in a sentencing memo that Chiesi “played him” to obtain tips.
Alan Kaufman, a lawyer for Chiesi, didn’t return a voice-mail message yesterday seeking comment about his client.
The jury also heard more than a dozen wiretapped conversations in which Kumar kept Rajaratnam abreast of developments in the Mubadala deal, including the amount of money it was willing to spend.
Rajaratnam told Kumar he needed to warn Ruiz not to talk to Chiesi about the deal, so Rajaratnam could have the information exclusively, Kumar said.
“Raj said the only way he was going to make money was to know when there was going to be a big transaction,” Kumar testified.
The jury heard an Aug. 15, 2008, call in which Rajaratnam spoke to Chiesi after Kumar informed Rajaratnam that the parties had agreed to “shake hands” in the Mubadala deal.
“AMD will not go bankrupt,” Rajaratnam told Chiesi on the call. He said Mubadala would invest $6 billion in the proposed deal. It was later reduced to $5 billion to $6 billion, Kumar told Rajaratnam.
“But we’ve got to keep this radio silence,” Rajaratnam said.
“Oh please, my pleasure,” Chiesi said.
“Not even to your little boyfriends,” Rajaratnam continued.
“I don’t have any,” she replied.
After Kumar informed Rajaratnam in September that the deal was to be announced in the first week of October, Rajaratnam called Chiesi within minutes of Kumar’s call.
“The date is Oct. 7,” Rajaratnam told Chiesi in a Sept. 30, 2008, call played for the jury.
“Oh, AMD is for sure?” she asked.
“Yeah, Monday,” replied Rajaratnam. “I own 25 million in AMD,” adding, “I am going to become Mr. October.”
“I am a little nervous because you know people are going to investigate me, I really believe that,” Chiesi answered.
“October 7, it’s called ‘Mubadala’” Rajaratnam said.
Chiesi told Rajaratnam she’d like to purchase 1 million shares of AMD, adding, “Hector told me that he went from saying he thinks ‘everything is fine’ to he thinks ‘it’s 110 percent fine.’”
“I’m long 25 and I’m taking the pain,” Rajaratnam told Chiesi. “But I’m, you know, I’m a warrior. They can’t, they can’t kill me. October’s my month.”
“I love that,” Chiesi replied.
In an August 2008 phone call recorded by the government, Rajaratnam’s brother, Rengan Rajaratnam, told the defendant he’d met with David Palecek, who was in charge of semiconductors for McKinsey. Rengan Rajaratnam said he asked Palecek, his former classmate at the Stanford Graduate School of Business, about buying AMD stock.
‘A Little Dirty’
“He’s like, ‘Buy it, buy as much as you can as soon as you can,’” Rengan Rajaratnam told his brother. In another later conversation, Rengan told Raj that Palecek was “a little dirty” and that he was “definitely, you know, thinking about playing ball” with Galleon.
“‘He said my best ideas are inside information,’” Rengan quoted Palecek as telling him.
Rengan Rajaratnam declined to comment. David Tobin, an attorney for Rengan Rajaratnam, didn’t immediately return a voicemail message seeking comment.
Palecek died last year of a virulent staph infection, his lawyer, Catherine Redlich said.
“What the tape does not reflect is that Mr. Palecek never agreed to ‘play ball’ with the Rajaratnams, never received money from them, and never agreed to put his wife on Galleon’s payroll,” Redlich said.
“If David were alive today, he would tell you that nothing was more important to him than his family, especially his four young daughters, and he would never have put them in harm’s way.”
The jury also heard a conversation in which Rajaratnam told a close friend at the firm that Galleon needed to create “an e-mail trail” to hide secret tips that the U.S. claims were illegal.
Prosecutors yesterday played a tape of an April 22, 2008, conversation between Rajaratnam and his friend Krish Panu, a Galleon managing director. Rajaratnam called Panu after being told by Kumar about a transaction involving Spansion Inc.
“I’ll send you an e-mail and say, ‘Have you guys thought about Spansion?’” Rajaratnam told Panu.
“Have a corporate record,” Panu replied.
“Yeah, we just have an e-mail trail,” Rajaratnam said.
Kumar continues his testimony today.
The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).