March 23 (Bloomberg) -- Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., told a jury that former Goldman board member Rajat Gupta violated the firm’s confidentiality policies by allegedly telling Raj Rajaratnam about the firm’s earnings and strategic plans.
Prosecutors called Blankfein to the stand to help build their case that Rajaratnam, the Galleon Group LLC hedge fund co-founder, traded on inside information about Goldman Sachs he obtained from Gupta. Rajaratnam, 53, is being tried in federal court in Manhattan on insider trading charges.
Blankfein testified that Gupta had confidential information about Warren Buffett’s $5 billion investment in Goldman Sachs in October 2008, Goldman’s earnings projections for that quarter and strategic discussions the firm had about acquiring a commercial bank or insurance company in late June 2008. Prosecutors allege that Gupta passed the tips to Rajaratnam, allowing him to make about $1 million for Galleon in September 2008 and avoid millions in losses the next month.
“We are a public company,” Blankfein said. “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.”
Rajaratnam is in the third week of his trial in the largest crackdown on hedge-fund insider trading in U.S. history. The Sri Lankan-born money manager is accused of making $45 million from tips leaked by corporate insiders and hedge fund traders. He denies wrongdoing, saying he based his trades on research.
In addition to the Goldman Sachs tips, prosecutors claim Gupta gave Rajaratnam information on quarterly earnings and financial results for Procter & Gamble Co., where Gupta was also a director.
Blankfein told jurors that Gupta and other board members were told in October 2008 that Goldman was facing the possibility of a quarterly loss for the first time since it went public in 1999.
He said that Goldman Sachs’s quarterly net revenue is typically “$9 billion to $10 billion.” At the time, when analysts wrongly believed Goldman was making a profit, it was running a $171 million loss so far in the quarter.
“I’d round it to about flat,” Blankfein said.
Prosecutors have alleged that in October 2008, Gupta tipped Rajaratnam, who sold off all of the fund’s entire position in Goldman and “saved Galleon millions in losses.”
Secretly Recorded Call
For a second time in the trial, which began March 8, jurors heard a July 29, 2008, telephone call, secretly recorded by the FBI, in which Gupta told Rajaratnam that the Goldman board had discussed acquiring a commercial bank or an insurance company.
“Have you heard anything along that line?” Rajaratnam asked Gupta during the call.
“Yeah,” Gupta replied, “This was a big discussion at the board meeting.”
Special Assistant Manhattan U.S. Attorney Andrew Michaelson, asked Blankfein about Goldman’s policy on board meetings.
“At the time were Goldman Sachs board members authorized to confirm or deny rumors?” Michaelson asked Blankfein.
“No,” Blankfein said.
“At the time was Rajat Gupta authorized to confirm or deny rumors about Goldman Sachs?” Michaelson asked.
“No,” Blankfein said.
Goldman Sachs Policies
“In this telephone call, did Rajat Gupta violate Goldman Sachs policies?” Michaelson asked.
“Yes,” Blankfein said.
When he took the stand at 10:20 a.m. today, Blankfein entered the courtroom, smiling broadly. He was called out of turn by the government because he will be outside the U.S. next week, Assistant Manhattan U.S. Attorney Reed Brodsky told U.S. District Judge Richard Holwell. Blankfein testified for more than 3 1/2 hours before leaving the stand at about 2:50 p.m.
During a break in court proceedings, Blankfein stood, smiled, rested his right arm against the jury box and looked in the direction of Rajaratnam. The defendant, who was seated in a chair behind the defense table, stared straight ahead.
On cross-examination that lasted about an hour, John Dowd, Rajaratnam’s lawyer, questioned Blankfein about a Goldman Sachs press release announcing that Gupta wouldn’t stand for re-election as a board member in March 2010. Dowd asked Blankfein to read the announcement aloud to the jury.
In the release, Blankfein praised Gupta’s “important contributions to Goldman Sachs as a board member.”
Dowd asked whether, at the time he issued the statement, he was aware of the government’s allegations against Gupta.
“I had an awareness of some -- I want to say I had an inkling, subsequently I had more awareness,” he testified. “I knew there were questions about Rajat’s behavior, that’s how I would say it.”
At a sidebar conference in court, Dowd said that Blankfein “had a conversation with Gupta when this matter broke in the press” about a year ago “and asked him about it.”
“I wouldn’t have had anything to do with that,” Gupta replied, according to Dowd.
Blankfein agreed with Dowd that Galleon was an important client of Goldman Sachs and that he had visited the firm “a long time ago.”
Dowd showed Blankfein news articles suggesting that rumors that Goldman considered buying a commercial bank -- possibly Wachovia Corp. -- were being discussed in public. He asked Blankfein if the confidentiality of information depends on what kind of information it is.
“The board’s reaction, even to a public topic, would be confidential,” he said, “because it emanates from the board.”
Dowd sought to show that information that the prosecutors claimed to have come from a Goldman Sachs board meeting hadn’t emanated from the meeting.
After Blankfein testified that his board had discussed a possible acquisition of Wachovia or American International Group Inc., Dowd confronted him with board minutes, pointing out that there was no mention of such discussions.
Blankfein disagreed, noting that a reference to a “strategic review” covered the subject.
Before Blankfein’s testimony today, Dowd said he may recall the Goldman Sachs chief later in the trial as a witness for the defense, telling the judge, “We’re not happy with the way the government has proceeded,” Dowd said, adding, “It’s outrageous.”
Blankfein described for the jury the discussions within Goldman Sachs management during the credit crisis of September 2008. The news that Buffett was going to invest money in Goldman Sachs meant a boost to the firm at a critical time, he said.
“We had $5 billion in cash that we didn’t have before, a significant amount of money,” he said. Investors “were likely to think we were in better shape as a result of this.”
Blankfein drew laughter from the courtroom audience when Michaelson asked him if Goldman Sachs getting $10 billion from the Troubled Assets Relief Program helped the firm. He said TARP funds weren’t available at the time Buffett made his investment.
“TARP was a bigger amount on better terms,” he said. “The government didn’t charge nearly as much money as Warren Buffett did,” Blankfein said, referring to the interest Berkshire charged.
Michaelson asked whether Goldman Sachs have sought Buffett’s money if TARP had been available earlier.
“Probably not,” Blankfein said. “If we knew the government was going to turn around and put money into banks, we probably wouldn’t have gone out and looked for investors,” he said. “In other words, we weren’t waiting or expecting the government to do that.”
Morgan Stanley Banker
After Blankfein’s testimony, prosecutors called Owen O’Keeffe, a Morgan Stanley investment banker. O’Keeffe testified about information that was available to Kamal Ahmed, a Morgan Stanley managing director, about several deals the bank worked on, including the 2006 purchase of ATI Technologies Inc. by Advanced Micro Devices Inc. Prosecutors claim Rajaratnam traded on insider information that originated from Morgan Stanley.
Ahmed’s lawyer, Douglas Tween, said his client has been placed on administrative leave and is cooperating with the bank’s investigation. Ahmed hasn’t been charged or sued in connection with the government’s allegations, he said.
“We remain confident he did nothing illegal or improper,” Tween said.
Pen Pendleton, a Morgan Stanley spokesman, declined to comment on the matter.
Prosecutors questioned former Intel executive Rajiv Goel for about 45 minutes this morning, then interrupted Goel’s testimony to question Blankfein. Goel is scheduled to resume his testimony tomorrow.
The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).
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