Tuesday, 30 August 2016
Last updated 2 hours ago
Mar 24 2011 | 12:46pm ET
Goldman Sachs CEO Lloyd Blankfein, testifying at the Raj Rajaratnam insider-trading trial, said that former Goldman Sachs board member Rajat Gupta violated firm policies when he told the Galleon Group founder about matters discussed at Goldman board meetings.
Blankfein was called by prosecutors to testify at about 10:20 a.m., yesterday, interrupting the testimony of alleged Rajaratnam tipster Rajiv Goel. The Goldman chief was on the stand for more than three hours.
Gupta, the former head of consulting giant McKinsey & Co., is accused of passing inside information about Goldman's earnings and an investment in the bank by Berkshire Hathaway to Rajaratnam, a longtime friend and business partner. Gupta, who has been charged by the Securities and Exchange Commission but is not criminally accused, has denied any wrongdoing.
Prosecutors played a tape of a recorded July 2008 telephone conversation between Gupta and Rajaratnam, with Blankfein affirming several times that the information the former had given the latter was confidential. At the end of the tape, prosecutor Andrew Michaelson asked if Gupta had violated Goldman's policies during the conversation.
"My sense of it, yes," Blankfein responded.
On the wiretapped call, Gupta, whom Blankfein identified in a photograph, is heard telling Rajaratnam that the Goldman board had just discussed buying a commercial bank, possibly Wachovia Corp., or an insurance company, possibly troubled giant American International Group.
On the call, Rajaratnam mentioned rumors that Goldman "might look to buy a commerical bank."
"Have you heard anything along that line?" Rajaratnam asked.
"Yeah," Gupta, who is expected to testify for the defense later in the trial, said. "There was a big discussion at the board meeting."
"At the time, were Goldman Sachs board members authorized to confirm or deny rumors?" Michaelson asked.
"No," Blankfein said.
"At the time, was Rajat Gupta authorized to confirm or deny rumors about Goldman Sachs?"
"No," Blankfein answered again.
"In this telephone call, did Rajat Gupta violate Goldman Sachs policies?"
"Yes," Blankfein testified.
"We are a public company," Blankfein testified. "We don't want information about our company to get outside before the time is appropriate. There is a process and a protocol for speaking to the outside world."
Blankfein described late 2008, when Gupta is alleged to have made his illicit disclosure, as "a dangerous time" that "made us nervous." He said that news of Berkshire's $5 billion investment would have been confidential when Gupta allegedly told Rajaratnam about it, and that it was "big news" for the market.
Blankfein also testified that Gupta's tip to Rajaratnam that Goldman would post its first-ever quarterly loss as a public company was confidential.
"We were losing money," Blankfein said.
"What was the significance of that?" Michaelson asked.
"We generally make money," a smiling Blankfein said, eliciting laughter in a rare moment of levity at the trial.
Prosecutors also sought to portray one of Wall Street's most powerful men as just a regular guy from the outer boroughs, having Blankfein testify that he grew up in Brooklyn and went to public high school. His undergraduate and law school days at Harvard University were not mentioned.
Under cross examination, Rajaratnam lawyer John Dowd showed Blankfein press clippings reporting that the firm might be seeking a commercial bank to buy.
"The board's reaction, even to a public topic, would be confidential, because it emanates from the board," Blankfein explained.
Dowd, citing the board minutes from the relevant meetings, noted that the topics discussed by Rajaratnam and Gupta did not appear to be covered. Blankfein said the discussions were the "strategic review" mentioned in the minutes.
Dowd also asked about Gupta's reputation and whether he was "a valuable board member."
"Subject to only what's in contention here, yes," Blankfein said.
Dowd asked if Blankfein, who had persuaded Gupta to remain on the bank's board during the height of the financial crisis in 2008, knew about the allegations against Gupta when he left the board last year.
"I had an awareness of—I want to say an inkling," Blankfein said. "I know a lot more after than I knew at that time, but I knew there was questions about Rajat's behavior. That's how I would say it."
In a sidebar with U.S. District Judge Richard Holwell, Dowd said that, about a year ago, Blankfein "had a conversation with Gupta when this matter broker in the press and asked him about it."
"I wouldn't have had anything to do with that," Gupta told Blankfein, according to Dowd.
Dowd also asked about an internal investigation Goldman conducted in late 2009 and early 2010, and mentioned that Blankfein was questioned by the Federal Bureau of Investigation in January. Prosecutors, who earlier yesterday won Dowd's assent not to discuss any regulatory trouble Goldman had found itself in, objected both times.
"We're not happy with the way the government has proceeded," Dowd said during the morning hearing. "It's outrageous." Dowd said he reserved the right to recall Blankfein to the stand.
During a break in the testimony, Blankfein left the witness stand to shake hands with Rajaratnam and his legal team. Blankfein and Rajaratnam exchanged a few words, eliciting a smile from the latter.
During his testimony, Blankfein described Galleon as a "prominent client" of Goldman and said he had once visited the firm's New York offices, before he became Goldman's CEO.
After Blankfein's testimony ended, prosecutors called Morgan Stanley banker Owen O'Keeffe to testify that confidential information about Advanced Micro Devices, a Morgan Stanley client, was available to Morgan Stanley managing director Kamal Ahmed. Prosecutors say that some of Rajaratnam's tips about AMD came from Morgan Stanley, although Ahmed has not been accused of any wrongdoing. He is currently on administrative leave from the investment bank as it conducts an investigation.
Earlier yesterday, former Goel, a former Intel Corp. executive, continued his testimony. Goel has pleaded guilty to providing confidential information to Rajaratnam.
During his short stint on the stand yesterday morning, Goel testified that, during a vacation with Rajaratnam in the South of France in July 2007, Rajaratnam "mentioned that he was either going to make me a lot of money or had made me a lot of money" by trading on a tip about the Blackstone Group's impending takeover of Hilton Worldwide.
Goel added that the Hilton investment seemed unusual to him, because Rajaratnam generally focused on technology and healthcare stocks.
Goel will be back on the stand today, the last day of testimony in the trial's third week.