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Kumar Gets Probation for His Galleon Trial Cooperation

Anil Kumar Gets Two Years’ Probation in Insider-Trading Case
Anil Kumar, a former partner at McKinsey & Co., left, exits federal court with his attorney Gregory Morvillo following a sentencing hearing in New York on July 19, 2012. Photographer: Peter Foley/Bloomberg

Crime doesn’t pay, but the lesson from insider-trader Anil Kumar’s case is that it pays to cooperate if you get caught.

Kumar, 53, the former McKinsey & Co. partner, was facing 25 years in prison after pleading guilty to participating in an insider-trading scheme with Galleon Group LLC co-founder Raj Rajaratnam. Instead, he received a term of two years’ probation.

U.S. Circuit Judge Denny Chin in Manhattan yesterday said he wouldn’t send Kumar to prison, and cited what prosecutors called Kumar’s “essential” and “extraordinary” cooperation as the first and key witness in the biggest insider-trading cases in U.S. history.

“There is the factor of extraordinary cooperation,” said Chin, adding that Kumar’s actions set him apart from other insider-trading defendants. “For some reason, in narcotics cases, the culture is the first one to cooperate, everyone wants to cooperate, everyone wants to get in. But, the culture is different in insider-trading cases and perhaps that will change.”

Kumar’s plea preceded the cooperation of two other Galleon turncoat witnesses, Adam Smith and David Slaine, who avoided prison in part by secretly recording incriminating conversations with other suspects.

Kumar, 53, also testified against his mentor, former Goldman Sachs Group Inc. director Rajat Gupta, who was convicted in June. Kumar helped pierce the veil of secrecy surrounding the insider-trading scheme and win the convictions of Rajaratnam and Gupta, Assistant U.S. Attorney Reed Brodsky said yesterday.

‘Aberrational Conduct’

“I am persuaded that this was aberrational conduct and that Mr. Kumar has led a law-abiding and productive life,” said Chin. “I am persuaded he cooperated not to get a lighter sentence, but to make amends for what he did.”

Chin credited Kumar for the speed and depth of his cooperation. Kumar, who was arrested and charged with Rajaratnam in October 2009, worked meticulously to aid the U.S., meeting with prosecutors over more than 50 days to help build their cases, his lawyer Paul Grand, a partner at Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, told the judge.

“I do not believe the ends of justice would be served by a period of incarceration,” Chin said. He also ordered Kumar to forfeit $2.26 million and pay a $25,000 fine.

Many white-collar crimes now carry significant prison terms -- including a 20-year statutory maximum for securities fraud -- giving defendants an incentive to cooperate.

First In

“Timing is everything in the courts, as well as in the market,” said J. Bruce Maffeo, a former federal prosecutor and now a criminal defense lawyer at Cozen O’Connor. “People who are in the door first typically get extraordinary leniency from the courts because they have something of value to trade with.”

Probationary terms for key insider-trading cooperators should help the government, Maffeo said.

“People tend to not pay attention to cooperating until there’s a knock on their door and a couple of federal agents are out there with a subpoena or handcuffs,” he said. “Sentences like this create an incentive. It’s a morality tale that the government will now use as they do in every other type of prosecution: to create an incentive for others to cooperate. That’s the clear message here.”

Kumar, who worked at McKinsey from 1986 to November 2009, pleaded guilty in January 2010 to one count each of conspiracy and securities fraud, admitting he had been part of an insider-trading scheme from 2004 to 2009.

At Rajaratnam’s trial last year, he said he passed inside information about client matters, including Advanced Micro Devices Inc.’s deal to sell chips to Hewlett-Packard Co. and AMD’s acquisition of ATI Technologies Inc.

Gupta Testimony

In June, Kumar told a jury how Gupta, who once led McKinsey, teamed up with Rajaratnam in 2006 to try to raise $2 billion for an investment fund.

Rajaratnam is serving an 11-year prison sentence at a federal facility in Massachusetts. Gupta is scheduled for sentencing in October.

More than a dozen people tied to Rajaratnam’s scheme have been prosecuted by the U.S. Few of the others ensnared in the investigation have cooperated with the U.S., Brodsky said.

He said Kumar’s testimony at Rajaratnam’s trial “was nothing short of devastating” and helped refute defense assertions that the fund manager traded on legitimate research and analyst reports.

By the time Kumar completed his direct testimony against Rajaratnam, prosecutors felt they had proven most of their case, Brodsky told Chin.

‘Great Skepticism’

“At the time of Mr. Rajaratnam’s arrest, there was great skepticism in the hedge-fund community and the investment community that Mr. Rajaratnam was simply being charged for being too aggressive in trying to obtain an edge based on research,” Brodsky said. Kumar’s early plea and testimony, “sent a clear message that what Mr. Rajaratnam did was obtain illegal information from inside sources like Mr. Kumar and traded on that information.”

Smith, a former Galleon portfolio manager who was sentenced to two years’ probation, made consensual recordings for the U.S. during the insider-trading probe. He also testified against Rajaratnam. Slaine wore a wire to record dozens of conversations with fellow former Galleon trader Zvi Goffer and testified at his trial.

Kumar apologized for his crimes yesterday.

“I stand in this court today completely and totally shamed by the conduct that has brought me before your honor,” Kumar said at the sentencing hearing. “It has brought me pain and suffering, and dishonor to my family, my friends and my business colleagues. I strayed from my core beliefs and all that I stood for my entire life.”

Wife, Son

His voice broke with emotion when he spoke of his wife and son and the impact of his actions on his family and his standing in the business community.

“I have become a pariah in that world and am followed by rumors and whispers,” he said. “I only implore the court to be merciful.”

Kumar led a “law-abiding life” until he was pulled into the insider-trading scheme with Rajaratnam, defense lawyer Greg Morvillo, a partner at Morvillo LLP said in court papers. Kumar testified he’d been a protégé of Gupta’s and had introduced the fund manager to Gupta, who ran McKinsey from 1994 to 2003.

Kumar described for prosecutors crimes they didn’t know he had committed, Brodsky said. Without Kumar’s help, it’s highly unlikely that the government would have been able to uncover the history and the route of the illicit payments Galleon made on his behalf because everyone involved lived outside the U.S. or worked for Galleon and had refused to aid the government, defense lawyers said.

‘Breathtaking Dedication’

“Anil fell prey to Mr. Rajaratnam’s manipulation,” Morvillo said in court papers.

Once he was arrested and charged, Kumar quickly decided to cooperate, Grand said. Since his arrest, he has worked with health institutions in the U.S. and India, including the Baylor College of Medicine in Texas and Max Institute of Healthcare Education & Research in India, defense lawyers said.

“I have seen him tortured by what he did,” Grand told the judge. “I have seen his efforts to be the best witness he could; I have seen him develop understanding of how this tragedy came about. I have been witness to his breathtaking dedication to the service of others.”

Kumar testified in June that 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, Kumar’s classmate at the University of Pennsylvania’s Wharton School, because of his expertise as a prominent hedge-fund manager.

“I’m not at all surprised by this sentence given the fact that he was an earlier cooperator,” said Maffeo, the former prosecutor. “The guy played his cards right, and the criminal justice system has served him well.”

The case is U.S. v. Kumar, 10-cr-00013, U.S. District Court, Southern District of New York (Manhattan).

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