Gupta, Rajaratnam Aspired to Start $2 Billion Fund, Kumar Says

Anil Kumar, a former McKinsey & Co. partner, testified against his former mentor, Rajat Gupta, describing how he teamed up with Galleon Group LLC co-founder Raj Rajaratnam in 2006 to try to raise $2 billion for an investment fund.

Kumar, who pleaded guilty to a participating in an insider-trading scheme with Rajaratnam, was called yesterday as a government witness at Gupta’s federal court trial in Manhattan. Prosecutors asked Kumar to explain to jurors the nature and history of various business ventures Gupta and Rajaratnam were part of and in which he served as an adviser.

Kumar, 53, said Gupta approached him in 2006 saying he wanted to start an investment fund after his scheduled retirement from McKinsey in 2007. Kumar said Gupta sought out Rajaratnam, who was Kumar’s classmate at the University of Pennsylvania’s Wharton School, because of his expertise as a prominent hedge fund manager.

Gupta “wanted to create the best asset management company in Asia, as good as the ones in America, but this would be focused on India,” Kumar said. “He wanted it to be widely based.”

Gupta, who ran McKinsey from 1994 to 2003 and later served as a Goldman Sachs Group Inc. director, is on trial for leaking tips to Rajaratnam about Goldman Sachs and Procter & Gamble Co., where he was also a director. He is charged with one count of conspiracy and five counts of securities fraud, which carry a maximum 20-year prison sentence.

‘Wise Man’

Kumar said he began working closely with Gupta in 1997 when the two co-founded a business school in India. He said he later introduced Gupta to Rajaratnam after the fund manager made an anonymous donation of $1 million to the school.

Gupta suggested that Rajaratnam, a prominent South Asian born in Sri Lanka, would be an obvious person to contact about the new venture, Kumar said.

“They both had a joint aspiration to raise about $2 billion for the fund,” Kumar said of Gupta and Rajaratnam.

Gupta told Kumar the role he’d play in the new venture would be “as a sponsor, a wise man, a strategy person, a raiser of funds, those kinds of things,” Kumar told jurors.

Gupta and Rajaratnam planned to have one unit dedicated to making private equity investments and another that would operate as a hedge fund focusing on South Asia, Kumar said. The fund that Gupta and Rajaratnam opened as Taj Capital was later re-named New Silk Route LLC, Kumar said.

‘High Testosterone’

Kumar said Rajaratnam told him he wanted to expand Galleon from a fund that had $7.2 billion in assets under management in 2007 to as much as $10 billion. Eventually just $1 billion in capital was raised for New Silk Route, an amount that displeased Rajaratnam, Kumar said.

Kumar said he participated in many meetings in which Gupta and Rajaratnam discussed the fund at Galleon’s offices located in Midtown Manhattan. New Silk Route eventually occupied space in an adjacent office on the same floor, he said. Rajaratnam’s office was next to a group of about a dozen traders who worked for him, Kumar said.

“It was very noisy offices, filled with people who were generally shouting and screaming and pretty high testosterone,” he testified.

Kumar, who was arrested on the same day as Rajaratnam in October 2009, pleaded guilty in January 2010 and hasn’t been sentenced. He is scheduled to return to court June 4 and continue his testimony, U.S. District Judge Jed Rakoff told jurors.

$84 Million

In other testimony yesterday, prosecutors called Heather Webster, a JPMorgan Chase & Co. private banker, who was Gupta’s personal banker for 10 years.

She testified that Gupta had a personal net worth of $84 million, $38.5 million in a trust and $11 million in cash in April 2008. Rajaratnam, in a letter to JPMorgan in August 2008, stated that Gupta had an investment of $16.4 million in another fund called Voyager Capital.

The defense has argued that Gupta lost his entire investment with Rajaratnam and even considered filing a lawsuit against the fund manager.

Rajaratnam and Gupta are the biggest figures caught in a nationwide insider-trading probe. Rajaratnam is serving an 11-year prison sentence after being convicted last year of insider trading.

Former Galleon trader Franz Tudor, who cooperated with the U.S. government's investigation, was sentenced yesterday to three years' probation for conspiracy and securities fraud.

Tudor, who pleaded guilty in October 2009, helped the government win a guilty plea from former Diamondback Capital portfolio manager Anthony Scolaro and aided in the prosecution of others charged with trading on illegal tips, including former Galleon trader Zvi Goffer, according to the U.S.

The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).

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