On Day 10, Goldman Sachs Group Inc. Chairman Lloyd Blankfein testified that the information, which defendant Rajat Gupta allegedly leaked, was confidential. Blankfein added that Gupta, who was a director at the investment bank, was not authorised to disclose classified matters discussed at its board meetings.
Highlights of trial:Day 1 | Day 2 | Day 3 | Day 4 | Day 5 | Day 6 | Day 7 | Day 8 | Day 9
Gupta, the former global head of McKinsey &Co., has been accused of leaking Goldman Sachs secrets to Raj Rajaratnam, co-founder of the Galleon Hedge Fund LLP, who was convicted of insider trading last year and is serving an 11 year prison term. Blankfein had also appeared as a government witness in Rajaratnam's trial.
In the first week of this trial, US government lawyers played a wiretapped conversation between the two men from July 2008 in which Gupta responds to Rajaratnam's query about a rumour that Goldman Sachs is considering buying commercial bank Wachovia (now acquired by Wells Fargo & Co.) or insurance company American International Group, Inc.
Rajaratnam says, "And there's a rumour, that Goldman might look to buy a commercial bank." He also says, "Have you heard anything along that line?" Gupta says, "Yeah, this was a big discussion at the board meeting."
Rajat Gupta trial:The case and defence
The prosecution has established that Goldman Sachs held a high-level meeting in St. Petersburg in June 2008 to discuss this strategy. "All parts of it were confidential," Blankfein said on Monday. "The board meeting itself is confidential."
Gupta's lawyer Gary Naftalis has argued that the prospect of Goldman Sachs acquiring a commercial bank was already public information. This call, however, is also not a basis for the US government's charges of securities fraud and conspiracy against Gupta.
In another instance, Gupta allegedly called Rajaratnam minutes after a Goldman Sachs board meeting on September 23, 2008 to tell him that Warren Buffett's Berkshire Hathaway Inc. was going to inject $5 billion in the investment bank. A few minutes before the market closed that day, Rajaratnam bought more than 200,000 Goldman Sachs shares.
Blankfein told the 12-member jury that Buffett's deal was publicly announced only after the market closed that day at 4 pm.
But government lawyers don't have a recording of Gupta passing the tip. They only have a wiretap of a conversation from the next day in which Rajaratnam tells Galleon trader Ian Horowitz, "I got a call at 3:58…saying something good might happen to Goldman."
Gupta's legal team has said that the prosecution's case is based on circumstantial evidence. Gupta is also accused of providing Rajaratnam insider tips about Procter & Gamble Co. while serving as a director.
The defendant also allegedly phoned Rajaratnam 23 seconds after an October 2008 board meeting of Goldman Sachs to tell him that the investment bank would report a fourth quarterly loss. The jury has heard a call made the next day in which Rajaratnam says, "I heard yesterday from somebody who's on the board of Goldman Sachs, that they are gonna lose $2 per share. The street has them making $2.50."
Blankfein testified that he had phoned directors, including Gupta, to warn them about the dismal performance before it was publicly announced--especially as experts were predicting better earnings for the investment bank. "Analysts were saying we were making money but we knew we were losing money," he said.
Blankfein also revealed that Gupta almost left the Goldman Sachs board in 2008 to join private equity firm Kohlberg Kravis Roberts & Co (KKR). The Goldman Sachs chief said that he advised Gupta that it would be difficult for him to advise both firms, which competed with each other in certain areas. "The prevailing feeling at the time was that it would be hard to do," he said. "We were not negative about it."
Gupta, however, never ended up leaving the investment bank. As the financial crisis in the US imploded, Blankfein felt that a director leaving at such a precarious time would be misconstrued. "It wasn't a good time to have a governance change," he told the courtroom.
The Goldman Sachs CEO also pointed out that the danger of competing with KKR had reduced since there was limited scope of private equity transactions in that market at the time. Gupta eventually worked with both places.
Kumar chided by Rajaratnam
Earlier in the day, Naftalis cross-examined government witness Anil Kumar , former senior partner at McKinsey, who pleaded guilty on insider trading charges last year.
Kumar, who also testified in Rajaratnam's trial, is cooperating with the government to get a reduced sentence. The prosecution is using Kumar to establish the extent of the relationship that existed between Rajaratnam and Gupta.
Gupta's counsel has argued that the two men were not on good terms and they eventually had a falling out in 2008 after Rajaratnam's mismanagement of their joint investment fund, Voyager Capital Partners, caused Gupta a $10 million loss.
Kumar told the jury that Gupta was "frustrated" at not being able to access accounts of fund and he had even considered suing Rajaratnam over the loss. "He was very annoyed, he was very emphatic, which is unusual," he said, describing Gupta as "generally a pretty calm guy". Kumar added that Gupta later learnt that Rajaratnam had not only mismanaged but also taken out money from the fund.
Kumar has pleaded guilty to telling Rajaratnam about the acquisition of microchip maker ATI Technologies Inc. by Advanced Micro Devices Inc., better known as AMD, his client while working at McKinsey. "I told him that this was red hot," Kumar testified, last year.
During his cross-examination on Monday, Kumar said that he had revealed information to Rajaratnam about his client because the billionaire hedge fund manager would "taunt" and "chide" about knowing more AMD secrets. "I tried to him show him that I knew more," he said.
There is no hearing on Tuesday. Blankfein is expected to return on Wednesday to complete his testimony and be cross-examined by Gupta's lawyers. The Goldman Sachs chief, however, will also be attending his daughter's graduation and a family luncheon on the same day in Yonkers, north of New York City.
Judge Jed Rakoff hasn't reached a final decision on whether to postpone Blankfein's testimony till Thursday. Rakoff, who also lives in Yonkers, asked Blankfein about which restaurant the lunch was being held. The judge then joked that he couldn't "afford" it.