McKinsey implicated in Galleon insider-dealing trial

McKinsey consultancy linked to biggest US biggest insider-dealing case since 1980s as former partner Anil Kumar testifies

The management consultants from the McKinsey group gather in Washington this week as the reputations of some its most senior former employees are on the line in a New York court.

The US government's biggest insider-dealing case since the 1980s is proving an embarrassment to McKinsey, whose blue-chip client list includes more than 90 of the 100 leading global corporations, and governments in more than 35 countries including the UK. Two senior McKinsey figures have already been implicated during the trial and a third is expected to be named this week.

According to prosecutors, Raj Rajaratnam, billionaire founder of the Galleon hedge fund, was fed lucrative and illegal tips about McKinsey clients by some of the consultancy's top executives. Rajaratnam is accused of making $50m (£31m) from these and other tips and faces up to 20 years in prison if convicted.

Anil Kumar, a former senior McKinsey partner who has pleaded guilty to securities fraud and is co-operating with the government, took the stand for the second day on Monday. Kumar, one of the prosecution's star witnesses, has agreed to forfeit $2.7m in fees and profits he received from Galleon.

Kumar said Rajaratnam paid him in the name of Kumar's housekeeper and passed him confidential documents about the chipmaker Intel, rival of Kumar's McKinsey client AMD.

Kumar alleged the hedge fund manager pressed him for financial details on AMD. "He wanted to move to an arrangement where he could monitor the benefits and share the profits," he testified.

Kumar was a protegé of Raj Gupta, former head of McKinsey and a former director of Goldman Sachs and Procter & Gamble. Gupta has been named as a co-conspirator and accused of passing inside information on to Rajaratnam about companies including Goldman and P&G.

In court Jonathan Streeter, a federal prosecutor, has mentioned a third, as yet unnamed, McKinsey executive. He is believed to be David Palecek, a former classmate of Rajaratnam's brother Rengan. Streeter told the jury they would hear a recording of a phone conversation Rajaratnam had with his brother "talking about plotting to get inside information from a consultant at McKinsey". Streeter said Rajaratnam described the executive as "dirty" and talked about getting him to "play ball" by adding his wife to the Galleon payroll.

Palecek died last year but Catherine Redlich, a New York-based lawyer who represents his wife, said in a statement: "What the tape does not reflect is that Mr Palecek never agreed to "play ball" with the Rajaratnams, never received money from them, and never agreed to put his wife on Galleon's payroll."

Last week Kumar testified that he shared client secrets with Rajaratnam because he felt obliged to him after agreeing to accept $500,000 a year in consulting fees. "Mr Rajaratnam kept asking me for that information and I felt that I owed him something given how much money he was paying me," Kumar told the court.

According to telephone conversations secretly taped by prosecutors, Kumar and Rajaratnam discussed transactions involving AMD, Business Objects, Cisco, eBay, Samsung Electronics, Spansion and other companies. Many of these firms were or are McKinsey clients.

A spokeswoman for McKinsey said the firm had no comment. Sources close to the firm said the trial and its implications would be discussed at this week's annual partners' meeting in Washington. More than 1,300 of McKinsey's senior staff are expected at the meeting.

Last week John Dowd, Rajaratnam's top lawyer, said it was a "monstrous lie" that his client had manipulated Kumar into betraying his clients. He said he would show that Kumar funnelled his money into his own accounts and did not properly inform McKinsey about it.

Kumar has said he violated McKinsey's policies when he shared confidential client information with Rajaratnam. McKinsey is built on a "foundation of trust", he said. If the firm ever lost its reputation for maintaining client confidences, he said, "it could destroy the trust that McKinsey had with its clients".

Founded in 1926, McKinsey is arguably the best-known management consultant in the world. The firm operates as a partnership and has strict rules on client confidentiality not least because its business operates on a "non-exclusive" basis with different teams allowed to work for competitors.


Dominic Rushe in New York

The GuardianTramp

Related Content

Article image
Top banks could be investigated over $20bn fire sale of hedge fund assets
Collapse of Archegos has reportedly prompted SEC and FCA inquiries into Credit Suisse, Goldman Sachs, Nomura and others

Kalyeena Makortoff Banking correspondent

30, Mar, 2021 @7:38 PM

Article image
Former Bear Stearns trader pleads guilty in insider trading case
Danielle Chiesi, a former consultant for Bear Stearns' New Castle Funds, is accused of earning more than $4m by trading on inside information

Dominic Rushe in New York

19, Jan, 2011 @7:01 PM

Article image
Former Goldman Sachs trader 'Fabulous Fab' goes on trial
Securities and Exchange Commission accuses Fabrice Tourre of misleading investors as vice-president of bank

Dominic Rushe, New York

14, Jul, 2013 @3:52 PM

Article image
Wall Street's secretive 'expert networks'
Galleon hedge fund founder Raj Rajaratnam's trial on insider-dealing charges has exposed a little-known world of expert advisers

Simon Goodley

04, Mar, 2011 @6:26 PM

Article image
Hippocratic oath' for bank workers meets with scepticism
Jonathan Bartley of Ekklesia, a religion and ethics thinktank, insists that a statement of values could help rebuild trust between the public and bankers

Tim Webb

18, Apr, 2010 @6:50 PM

Article image
Former Goldman Sachs director charged with insider dealing
The SEC alleges former UN adviser Rajat Gupta fed tip-offs to Galleon hedge fund manager Raj Rajaratnam before the information became public

Dominic Rushe in New York

01, Mar, 2011 @8:47 PM

Article image
Sky-high stakes, yet HSBC is taking risks with US justice
US DoJ’s doubts about bank’s ability to institute reform and combat financial crime should be sounding loud alarm bells

Nils Pratley

22, Feb, 2016 @7:29 PM

Article image
Angry JP Morgan shareholders seek to strip Jamie Dimon of chairmanship

US banking giant facing revolt by dissidents in wake of $6bn London Whale trading loss last year

Dominic Rushe in New York

19, May, 2013 @4:51 PM

Article image
How the SEC is enabling Wall Street's fungal creep into Main Street | Heidi Moore

Heidi Moore: New rules allowing hedge funds to advertise encourage baby-boomers to bet their pensions. What could possibly go wrong?

Heidi Moore

10, Jul, 2013 @7:09 PM

Article image
Goldman Sachs investigation could put Wall Street under microscope
SEC looking into whether Paulson deal described as 'surreal' was a one-off

Jill Treanor

19, Apr, 2010 @6:28 PM