On day 4, the US government called more witnesses to prove that Rajat Gupta, former global head of McKinsey & Co., was leaking confidential secrets about Goldman Sachs Group Inc. and Procter & Gamble Co. while serving as a director for both.
The prosecution called as a witness William George, a Goldman Sachs director and a Harvard Business School professor, who described the rules that guided directors in the investment bank. The government witness read out clauses on "confidentiality" and "personal conflict of interest" from Goldman Sachs's Corporate Governance Rules and its Code of Business Conduct & Ethics.
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George's testimony also provided a peek into the inner workings of the Goldman Sachs boardroom. The government witness told the 12-member jury about the meetings that were attended by the bank's brass in June 2008 in St. Petersburg, Russia. "I do," replied George, when asked by Assistant U.S. Attorney Reed Brodsky if he recalled a discussion on acquiring a commercial bank or insurance company. George added that he advised against it.
The prosecution also showed a document sent to the directors on July 14, 2008 by Goldman Sachs Chairman Lloyd Blankfein, which read, "We would be receptive to being asked to acquire a distressed bank at an attractive price."
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The US government lawyers are connecting George's testimony with a conversation between Gupta and billionaire hedge fund manager Raj Rajaratnam on July 29, 2008, which was secretly being recorded by the US Federal Bureau of Investigation. Rajaratnam, co-founder of the Galleon Group LLP hedge fund, was convicted of insider trading last year in May and sentenced in October to 11 years in prison --- the longest term ever for such a crime.
The wiretap, which was played on Wednesday, the third day of the trial hearings, has Gupta responding 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."
The former McKinsey honcho's lawyers have argued that Goldman Sachs had already discussed the possibility of acquiring a commercial bank with analysts. Gupta's responses on this call are also not a basis for the US government's charges against him. Judge Jed Rakoff, who allowed the call to be played, has explained that the conversation was the only way for the jury to hear how the two men communicated with each other.
The fourth day of the trial was filled with intense sparring between the prosecution and Gupta's counsel over George's testimony. The prosecution wanted to ask George whether the information being shared with Goldman Sachs's directors in the summer of 2008 was confidential. Brodsky distinguished this line of inquiry from asking George's opinion on Gupta's chat with Rajaratnam on July 29, and whether the defendant breached his duty as a director in that call.
Gupta's team, however, argueed Brodsky's question was just another way of getting George to say that Gupta breached his duty, which would prejudice the jury especially if it comes from a knowledgeable Harvard professor. "They called George to take advantage of that cache," Gary Naftalis, defending Gupta,told the judge.
Both sides argued for over a half-hour after the day's legal proceedings were completed. Judge Rakoff, who rule on Friday whether to allow the prosecution's line of enquiry with George, articulated the pertinent question as "is his (George's) understanding relevant to the jury's determination of Mr Gupta's understanding?"
Gupta has also been accused of telling Rajaratnam about Procter & Gamble selling its Folgers Coffee brand to Ohio-based The JM Smucker's Co., before the deal went public in June 2008.
The US government lawyers called as a witness, Mark Belgya, Chief Financial Officer of The JM Smucker's, who provided details about how the transaction was kept secret.
Belgya, however, also told the jury that the information about the acquisition was leaked to the media before the public announcement. During cross-examination, the Gupta's legal team tried to establish that the leak could have come from any of the employees of the banks and lawyers who were participating in forging the deal.
Earlier in the day, the prosecution played more wiretaps of Rajaratnam discussing with Galleon employees tips about Goldman Sachs that he allegedly received from Gupta.
The US government lawyers claim that after a Goldman Sachs board meeting on September 23 2008, Gupta immediately phoned Rajaratnam to tell him that the investment bank was going to receive $5 billion from Warren Buffet's company Berkshire Hathaway.
The prosecution is trying to prove that Rajaratnam's decision to buy more than 200,000 shares of Goldman Sachs, just minutes before the market closed that day, was based on Gupta's call. The prosecution has a record of the call being placed from Gupta to Rajaratnam's phone but it does not have a recording of the actual conversation.
Carolann Shields, an employee at the McKinsey IT department, was called in by the prosecution. Shields, who tracks phone records at the consulting firm, said that a call from the conference room of the McKinsey office in New York was connected to Goldman Sachs boardroom on September 23, 2008. This call very likely discussed the Buffett deal. Then, Shields said, at 3:55 pm another call from Gupta's personal assistant went to Rajaratnam's phone, which lasted for about 30 seconds.
The prosecution, however, has 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 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. On Thursday, the prosecution played for jury 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."