Goldman Sachs Group Inc. (GS) Chief Executive Officer Lloyd Blankfein agreed to be a prosecution witness in Galleon Group LLC co-founder Raj Rajaratnam’s insider trading trial next week, said a person briefed on the matter.
Blankfein, 56, may not testify because prosecutors typically line up potential witnesses before a trial who aren’t later called on, said the person, who declined to be identified because the talks are private.
Rajaratnam is at the center of the largest crackdown on hedge-fund insider trading in U.S. history. The Sri Lankan-born billionaire is charged with earning $45 million from confidential information leaked by corporate insiders and hedge fund traders. If convicted, the 57-year-old could spend as long as 20 years in prison on the fraud charges. He denies wrongdoing, saying he based his trades on Galleon research.
Prosecutors are likely calling Blankfein as a witness to show that Rajaratnam traded on inside information about Goldman Sachs, said Andrew Stoltmann, a securities lawyer in Chicago. Rajaratnam got a tip from then-Goldman Sachs director Rajat Gupta about a $5 billion investment in the firm by Berkshire Hathaway Inc., and Gupta allegedly passed the news immediately to Rajaratnam, who bought shares, according to U.S. allegations in court papers.
“There’s no question it’s a timeline issue,” Stoltmann said in an interview. Also, “they really want to rope Goldman Sachs into the trial” because the firm may be viewed unfavorably by jurors, he said.
Gupta may invoke his constitutional right not to testify if he believes it would incriminate him, said Stoltmann, who is not involved in the case.
The Securities and Exchange Commission has separately filed administrative charges accusing Gupta of leaking confidential information to Rajaratnam, including Berkshire’s investment in Goldman, the securities firm’s quarterly earnings, and the results of Procter & Gamble Co., where Gupta was also a director. The action was filed March 1.
Gupta stepped down from Goldman Sachs’s board last year and resigned from Procter & Gamble this week. Gupta is the former managing director of McKinsey & Co., the consulting firm, and is currently the firm’s senior partner emeritus.
Ed Canaday, a spokesman for Goldman Sachs, said he couldn’t comment. Edeli Rivera, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan, declined to comment. Jim McCarthy, a spokesman for Rajaratnam, declined to comment.
The SEC action threatens Rajaratnam’s right to a fair trial, his lawyer, John Dowd, said in a filing yesterday in federal court in Manhattan. Dowd attached a Feb. 28 letter he wrote to the SEC urging it not to take action against Gupta until after Rajaratnam’s trial.
Gupta has given the SEC “powerful evidence that Mr. Gupta and Mr. Rajaratnam did not engage in insider trading in the stocks of Goldman Sachs and Procter & Gamble,” Dowd wrote to the SEC, referring to a submission that Gupta gave the agency last week. “Much of the specific information contained in that submission was new” to Rajaratnam, according to Dowd, who said he was preparing to call Gupta as a trial witness.
Gary Naftalis, a lawyer for Gupta, called the SEC’s allegations “baseless” on March 1. He declined to comment yesterday.
The case is U.S. v. Rajaratnam, 09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).
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