March 14 (Bloomberg) -- Last week, under questioning by a prosecutor, former McKinsey & Co. director Anil Kumar told jurors that he was pressured by Raj Rajaratnam to leak stock tips. This week, defense lawyers will try in cross-examination to depict Kumar as a “monstrous” liar.
Kumar is the first of several government witnesses to testify that he leaked stock tips to Rajaratnam, the co-founder of the Galleon Group LLC hedge fund who is on trial for trading on inside tips. For 2 ½ hours on March 10, Kumar told federal jurors in Manhattan about his decades-long friendship with Rajaratnam and his reason for spilling the secrets of McKinsey clients in return for $2.7 million in secret payments from Galleon.
Kumar’s direct testimony resumes today. He’s expected to testify that he tipped Rajaratnam about transactions involving Advanced Micro Devices Inc., EBay Inc., Cisco Systems Inc., Business Objects SA, Samsung Electronics Co. Ltd., Spansion Inc. and other companies, according to court records. After that, defense lawyers will cross-examine Kumar to “chip away” at his account, which appears “really hurtful” to Rajaratnam, said Andrew Stoltmann, a securities lawyer in Chicago.
“It’s a two-pronged attack,” said Stoltmann, who isn’t involved in the case. “The number one attack is on his credibility. And also, the defense has to provide an alternative explanation for why Kumar did things.”
Rajaratnam, 53, is on trial 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 tips leaked by corporate insiders and hedge fund traders. Rajaratnam said his trades were based on Galleon research.
The government’s case rests on hundreds of secret wiretaps of Rajaratnam and testimony from alleged accomplices including Kumar, who has pleaded guilty and is hoping for leniency in return for his testimony.
On the witness stand last week, Kumar, a native of Mumbai, spoke softly and didn’t look Rajaratnam in the eye as he entered the courtroom. He graduated in 1983 from the Wharton School at the University of Pennsylvania, where he met Rajaratnam. He spent his first day testifying why and how he leaked information to his friend.
“Mr. Rajaratnam kept asking for that information and I felt that I owed him something, given how much money he was paying me,” Kumar, 52, said. He quoted Rajaratnam as saying, “You work very, very hard and you’re underpaid.”
In opening statements on March 9, defense attorney John Dowd held little back as he explained how the defense would try to undermine Kumar.
First, the defense will use records from Galleon and McKinsey to show that the funds paid to Kumar were “honest payments” for “valuable consulting work,” as Dowd said in his opening statement to jurors on June 9.
“Kumar was paid consulting fees for his advice and guidance in the Indian and South Asian investment markets,” Dowd said.
Next, the defense will go on the attack, telling jurors that Kumar is telling a “monstrous lie” about the nature of the payments, as Dowd said last week.
“He never shared these consulting fees with his McKinsey partners,” Dowd said of Kumar. “Instead he hid them in shell companies in overseas bank accounts and he failed to report these consulting fees on his tax returns to the Internal Revenue Service.”
And now, facing 25 years in prison for tax fraud and other crimes, Kumar is trying to win his freedom by turning on his friend and testifying “that Raj made him do it,” Dowd said. “He is trying to pass the blame to Raj in order to get a free pass from the government.”
Third, Dowd will summon other facts that he said support the defense argument. Why would Galleon maintain records of its dealings with Kumar if Rajaratnam wanted to hide them, Dowd asked jurors? Why would Rajaratnam help Kumar quit the consulting firm if “Kumar was Raj’s mole inside McKinsey?” he wondered.
Why was Kumar’s performance as a Galleon portfolio manager so poor in 2007 and 2008 if Kumar could tap inside information? Dowd asked, and then offered dozens of details about many of the stock trades to show that Rajaratnam had legitimate reasons for trading.
“It makes no sense,” Dowd, an ex-Marine, told jurors of Kumar’s anticipated testimony. “What does make sense is why Kumar is testifying against Raj now. He is now facing 25 years in prison and the only way out is for him to testify to the prosecutor’s satisfaction against Raj.”
“Dowd appears to be trying to give a legitimate legal explanation for the payments,” said Frank Razzano, a former federal prosecutor in New Jersey and now a partner at Pepper Hamilton LLP in Washington. He’s not involved in the Galleon case. “He wants to show that Kumar is a liar who has made an unholy alliance with the government.”
Prosecutors have already begun to anticipate and counter Dowd’s arguments, Razzano said. In addition to playing wiretaps that support Kumar’s account,
Assistant U.S. Attorney Jonathan Streeter had Kumar say on direct examination that his cooperation deal with the government requires him to tell the truth, and prosecutors said they have wiretaps that corroborate Kumar’s account.
Should he lie, Kumar said, the government may deny him the leniency he seeks when he’s eventually sentenced and may even prosecute him for perjury.
“That would be a very big mess,” Kumar testified.
The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).
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