NEW YORK — A former director of a global management consulting firm pleaded guilty Thursday to securities fraud charges, admitting making $2.6 million by feeding inside stock information to one of America's richest men in history's largest hedge-fund insider trading case.
Anil Kumar, 51, of Saratoga, Calif., entered the plea in U.S. District Court in Manhattan in a cooperation deal aimed at strengthening the government's case against billionaire hedge-fund operator Raj Rajaratnam.
Rajaratnam reaped $19 million from investments made after Kumar, a former senior partner and director at McKinsey & Co., fed him tips between March and July 2006 about the acquisition of ATI Technologies Inc. by Advanced Micro Devices Inc., Assistant U.S. Attorney Jonathan R. Streeter said.
He said Rajaratnam paid Kumar $1.7 million to $2 million for his tips, including a $1 million bonus after the ATI and Advanced Micro Devices deal was announced.
"Anil, you're a hero," Streeter said Rajaratnam told Kumar after the big score. Prosecutors say Rajaratnam and Kumar had a personal relationship after the pair met in business school in the 1980s.
Streeter said the deal Rajaratnam made with Kumar in 2003 called for Kumar to be paid up to $500,000 annually to feed tips to Rajaratnam with the understanding that Kumar would invest some of the money in the Galleon Group hedge funds, which Rajaratnam founded and controlled.
The government filed papers this week in Rajaratnam's case to say they planned to file additional charges against him after learning about the $19 million, which prosecutors say raises the amount Rajaratnam made from illegal deals to at least $36 million in profit.
Rajaratnam is free on $100 million bail after his October arrest on charges that he led a massive insider trading ring that involved key executives at several U.S. companies. The Securities and Exchange Commission has said the inside trading ring made more than $50 million.
Rajaratnam, 52, was ranked No. 559 by Forbes magazine last year among the world's wealthiest billionaires, with a $1.3 billion net worth.
John Dowd, Rajaratnam's lawyer, said in a statement in response to Kumar's plea Thursday: "Raj Rajaratnam did not make payments to Mr. Kumar or anyone else in return for providing inside information."
And in papers filed in federal court, Dowd said his client is "committed to – indeed, he is singularly focused on – defending this case, reclaiming his reputation, and disproving the allegations that destroyed one of the most highly esteemed investment management companies on Wall Street and the livelihoods of more than 125 of its employees."
Dowd also said his client is not a billionaire, though he is wealthy.
As he confessed to charges of conspiracy and securities fraud, the emotional Kumar paused several times to compose himself.
"I understand this conduct was unlawful and constituted a breach of my fiduciary duties," said Kumar, who told Judge Denny Chin that he was taking medicine for anxiety and depression.
He said the crimes were carried out from 2003 to 2009. The charges carry a maximum of 25 years in prison, though Kumar can win leniency through his cooperation. Sentencing was set for March 26, a date likely to be postponed because of Kumar's cooperation.
In a release, U.S. Attorney Preet Bharara described the insider trading ring as "essentially a get-rich-quick scheme for the already wealthy."
He added: "Greedy investors who cavalierly break the law to buy their way to even greater wealth will be treated for what they are: common criminals."
Prosecutors said the Kumar plea provided another example of how the insider trading ring sometimes utilized information other than mergers and acquisitions tips.
The government said that Kumar in October 2008 tipped off Rajaratnam that eBay Inc. planned to announce substantial layoffs in a few days, leading Rajaratnam to bet the company's stock would fall by selling borrowed shares. Prosecutors said he earned $500,000 when the announcement was made.
Prosecutors also said Rajaratnam paid Kumar through a Swiss bank account held in the name of one of Kumar's domestic workers, but later switched the holder of the investment to an overseas entity after the SEC began looking into Galleon.