The investment by Warren Buffett in Goldman Sachs Group Inc. (GS) in September 2008 was so confidential that even his chief financial officer was unaware of it before being briefed on the details by a Goldman Sachs executive, a witness at the Rajat Gupta trial testified.
Byron Trott, who was vice chairman of investment banking at Goldman Sachs and the architect of the $5 billion investment by Buffett’s Berkshire Hathaway Inc. (BRK/B), testified yesterday at Gupta’s insider-trading trial. Prosecutors, who called Trott as a witness, claim that Gupta, then a Goldman Sachs director, tipped Galleon Group LLC co-founder Raj Rajaratnam before the Buffett deal became public on Sept. 23, 2008.
“It was a major, major event to Goldman Sachs and to the markets,” Trott told jurors in Manhattan. “Five billion dollars was not easily found at that time.”
Prosecutors summoned Trott to tell jurors about the secrecy surrounding a deal that came soon after the collapse of Lehman Brothers Holdings Inc. and while the markets were in free-fall. At the time, Goldman Sachs needed at least $5 billion to “continue to exist,” he said.
“Our entire foundation was built on confidential information, and it could never be breached,” said Trott, who left Goldman Sachs in 2009 after 27 years at the bank. He said he operated on a “need-to-know basis.”
Trott declined to comment after completing his testimony.
Gupta, who ran the consulting firm McKinsey & Co. from 1994 to 2003, is accused of passing multiple insider tips to Rajaratnam in a conspiracy that ran from 2007 to January 2009. Rajaratnam is serving an 11-year prison sentence for insider trading. Gupta denies wrongdoing.
Prosecutors say Gupta, 63, leaked inside information to Rajaratnam about New York-based Goldman Sachs and Cincinnati-based Procter & Gamble Co. (PG), the world’s largest consumer-products company. Gupta, who was a director at both companies, is charged with conspiracy and securities fraud.
Also yesterday, at a hearing outside the jury’s presence, Assistant U.S. Attorney Reed Brodsky said that another Goldman Sachs executive, David Loeb, was heard on a government wiretap passing information to Rajaratnam.
Brodsky told U.S. District Judge Jed Rakoff that Loeb passed tips about Intel Corp. (INTC), Apple Inc. (AAPL) and Hewlett-Packard Co. (HPQ) The prosecutor made his remarks after defense attorney Gary Naftalis complained to the judge that prosecutors withheld evidence about Loeb, who hasn’t been charged with wrongdoing. Brodsky denied that allegation.
“Mr. Loeb, the evidence will show, provided Intel, and Apple and Hewlett-Packard information to Mr. Rajaratnam,” Brodsky said, adding Loeb didn’t have access to or tip Rajaratnam about Goldman Sachs earnings or the Buffett deal.
“There is no evidence, zero, none from the government that Loeb had access to material nonpublic information about Goldman’s earnings,” he said. “The defense wants to blow this up and confuse the jury,” Brodsky said in response to Naftalis’s comments about Loeb.
Brodsky’s statement is the first time the government has publicly named Loeb and confirmed that the U.S. has evidence that he gave information about Apple, Intel and Hewlett-Packard to Rajaratnam.
Michael DuVally, a spokesman for Goldman Sachs, declined to comment on the statements about Loeb.
Before that exchange, Trott became the third witness to describe events that preceded Galleon’s purchase of 267,000 shares in Goldman Sachs in the minutes before the stock market closed on Sept. 23, 2008.
Testifying about a “time of turmoil” and “fear” in the markets, Trott told jurors that he twice reached out to Buffett to see whether he’d be willing to invest in Goldman Sachs. Buffett, with whom Trott had a “special relationship,” rejected a first overture but was receptive to a renewed request on Sept. 22 of that year, he said.
Seal of Approval
The second proposal had terms closer to Buffett’s liking, including $5 billion in preferred stock carrying a 10 percent interest rate and the right to buy common shares of stock in a new public offering. Buffett also insisted that top Goldman Sachs executives not sell their own shares.
“Was this discussion confidential?” Brodsky asked.
“Very,” said Trott, who was based out of Chicago and working out of New York at the time. Trott said that winning Buffett’s investment was “like getting the Good Housekeeping seal of approval.”
They hammered out the deal in a 20-minute telephone call on Sept. 23 in which Trott said he wanted Buffett to be the “cornerstone” of the transaction. After they reached a tentative agreement, Buffett told Trott not to telephone until later that afternoon because he had an important appointment.
“He told me he promised his grandkids to take them to Dairy Queen, and he was not to be interrupted,” Trott said.
Goldman Sachs executives including Chief Executive Officer Lloyd Blankfein and Chief Financial Officer David Viniar signed off on the deal, and then took it to the full board of directors at 3:15 p.m. that day, Trott said. The board, including Gupta, met by telephone, he said.
“The impact on Goldman Sachs was market-moving,” he said. “The markets were in chaos.”
Trott said he spoke to Buffett after the deal was approved, and Buffett asked him to brief Berkshire’s CFO, Mark Hamburg, with the details.
“Warren had alerted him that I’d be calling him about a deal he’d agreed to,” Trott said, laughing and turning to explain to the jury. “Mark Hamburg didn’t know the details until well after the close of the market.”
Rajaratnam, by contrast, knew of the investment before the market closed, prosecutors allege.
At the end of the day, jurors in the case heard Gupta’s voice for the first time when prosecutors played the full version of a wiretapped call between Rajaratnam and Gupta. An abbreviated version of the recording had been played at Rajaratnam’s trial last year.
During the July 29, 2008, call, which lasted more than 23 minutes, Gupta sought career and business advice from Rajaratnam, including on how he or his firm, New Silk Route Partners, should deal with “Henry” and “KKR,” an apparent reference to KKR & Co., the buyout firm co-founded by Henry Kravis and George Roberts.
Gupta, who had left McKinsey at that time, was then also an investor with Rajaratnam. In a relaxed conversation between longtime associates, Gupta offered to work with Rajaratnam in the future.
“I want you to keep us, to keep having the dialogue as to what, you know, how I can be helpful in Galleon,” Gupta said on the wiretapped call.
During the call, Gupta discusses new opportunities.
“The KKR, I would do it in a heartbeat,” Rajaratnam says. The fund manager also said he wanted to build Galleon “into a 10 billion dollar company, hopefully by the end of 2009.”
“Yes,” Gupta said. “Yes you will.”
Trial testimony continues today.
The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).
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