I’m still pretty gobsmacked in reading the bits of testimony presented in the financial media’s accounts of the first day of testimony in the SEC’s insider trading case against hedge fund manager Raj Rajaratnam.
I’m struck by how simple it seemed in retrospect for Rajaratnam to suborn McKinsey partner Anil Kumar. Kumar had been pitching Rajaratnam’s fund as a prospective client, since the hedgie claimed to have a budget of $100 million a year to spend on research. But Rajaratnam was cool to Kumar’s proposals. After a charity event, Rajaratnam turned the tables and started wooing Kumar, telling him he was smart, underpaid, and he really just wanted his insights, not the firm’s.
Now partners can in fact bill clients on an unlevered basis (at least in my day), meaning a price that led to a similar level of profit as when working with a normal team with everyone’s cost suitably marked up. They didn’t for practical reasons, namely, it would quickly lead to a burn rate that clients would deem unacceptable. I was brought in by McKinsey to work on a client project a few years after I had left the firm, in the early 1990s when the topic came up. The number then was $20,000 a day. Given how much the firm’s rates increased in the 1990s, I’d guesstimate it would be easily double that by 2004.
So it was pretty apparent what this was really about when Rajaratnam suggested paying Kumar $500,000 a year in via an offshore account .
But here are the parts that indicate a complete lack of a sufficiently criminal mind on behalf of the McKinsey partner. He exchanged information with Rajaratnam on a regular phone line of some sort, I presume his cell phone or perhaps one of his land lines.
I’m far from technology savvy, but I know there are ways to conduct phone calls so that they do not go through any telco central office switch (you set up a computer to be the switch). You and your compatriots need dedicated cell phones to access the private switch. You still run the risk of having your signal intercepted (something which plagues the English royal family). Or as insider trader Dennis Levine did in the 1980s, you use a pay phone (a pain, and you’d presumably need to keep using different ones, which might not be that hard for a jet setting McKinsey type).
But this is the part that strikes me as really barmy:
Mr. Rajaratnam later told Mr. Kumar that he should get someone outside the U.S. to sign the consulting agreement on his behalf with Galleon and had him set up an account with Galleon under Mr. Kumar’s housekeeper’s name in order to reinvest the money with Galleon, Mr. Kumar said. The structure was so McKinsey didn’t know about the payments, Mr. Kumar said.
So Kumar has an agreement, not in his name, and “his” money is in Galleon hands.
That money was in no real sense ever his money. The SEC can seize it, but what ability did Kumar have to get at it? Even if he had been smart about he did negotiate the offshore agreement (UK is very tough; failure to honor contracts that have clear payment and withdrawal arrangements can be argued to be an admission that the company is “trading insolvent”, which makes the directors personally liable) did he have any practical ability to enforce it? His “payment” was just round tripped back to Galleon, he remained dependent on Rajaratnam’s continued good will if he were ever to access a dime. Hence by having control of Kumars account, the hedgie had leverage to keep extracting more from him, independent of continued “payments”.
It may prove a tad ironic if Rajaratnam’s having picked such a mark was what led to his downfall.