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Goldman’s Blankfein to Testify at Gupta Trial, U.S. Says

Former Goldman Sachs Director Rajat Gupta
Rajat Gupta, former Goldman Sachs Inc. director and former senior partner at McKinsey & Co., arrives at federal court for his trial on insider-trading charges in New York on May 23, 2012. Photographer: Louis Lanzano/Bloomberg

Lloyd Blankfein, Goldman Sachs Group Inc.’s chief executive officer, will testify at the insider-trading trial of the bank’s former director Rajat Gupta, a prosecutor said.

With jurors briefly out of the courtroom yesterday, Assistant U.S. Attorney Reed Brodsky told U.S. District Judge Jed Rakoff in Manhattan that prosecutors would call Blankfein as their next-to-last witness before wrapping up about June 6. Brodsky didn’t say what Blankfein would testify about.

Blankfein testified at last year’s trial of Galleon Group LLC co-founder Raj Rajaratnam, to whom Gupta is accused of leaking inside information. Rajaratnam was convicted and sentenced to 11 years in prison. Gupta denies wrongdoing.

At Rajaratnam’s trial, Blankfein said Gupta violated Goldman Sachs’s confidentiality policies by allegedly telling Rajaratnam about the firm’s strategic plans.

“We don’t want information about our company to get outside before the time is appropriate,” Blankfein testified on March 23, 2011.

Michael DuVally, a Goldman Sachs spokesman, declined to comment on Blankfein as a witness in Gupta’s trial.

Defense attorney Gary Naftalis identified likely defense witnesses, listing Gupta family members and Gupta’s personal assistant. Naftalis also said he planned on reading deposition testimony from Berkshire Hathaway Inc.’s reinsurance chief, Ajit Jain, a close friend of Gupta’s. Naftalis said he didn’t know yet whether Gupta will testify on his own behalf.

Berkshire Deal

Gupta, who ran McKinsey & Co. from 1994 to 2003, is on trial for leaking tips about Goldman Sachs and Procter & Gamble Co., where he was also a director. One of the alleged tips involved a Berkshire Hathaway investment in Goldman Sachs. Prosecutors say Gupta tipped Rajaratnam after learning about the deal in a Goldman Sachs board meeting at 3:55 p.m. on Sept. 23, 2008.

Rajaratnam and Gupta are the biggest figures caught in a nationwide insider-trading probe. Gupta, who has pleaded not guilty, is charged with conspiracy and securities fraud, which carries a maximum 20-year prison sentence.

Much of the afternoon yesterday was devoted to testimony from another Goldman Sachs executive, Stephen Pierce, who in 2008 was head of equity capital markets for the Americas and put together the secondary stock offering that followed the Berkshire investment. He is now global head of equity capital markets.

‘Janitorial Closet’

Pierce told jurors that he was at a New York Yankees game on Sept. 21, 2008, two days before Berkshire invested, when he fielded an urgent call from his boss, David Solomon. Seeking privacy at the ballpark, he said he took the call “in a janitorial closet.”

Pierce said he rushed to his office and began mapping strategy with an associate for raising $10 billion. Seeking to maintain confidentiality, the group gave the capital-raising project a code name, Pierce said.

“It was Project Lotus,” he testified.

At around 11:30 a.m. on Sept. 23, 2008, Pierce said he was told the “extremely confidential” news about the Berkshire investment. With Buffett on board, Pierce’s job was now to put together a secondary offering worth at least $2.5 billion, he said.

“To have Warren Buffett agree to put $5 billion in Goldman Sachs was a vote of confidence,” he said.

‘Wall-Cross Process’

News of Berkshire’s investment and the stock offering wouldn’t be made public for about six hours. To find investors, Pierce said he used a “wall-cross process:” Goldman Sachs’s sales heads were allowed to brief clients, mostly mutual funds, about the confidential deal so long as the sales chiefs and clients agreed not to trade on the news before it became public.

“There was quite a bit of interest” in the offering, Pierce said. “Ultimately, we’d set out to raise $2.5 billion and the demand was in excess of $20 billion.”

Through their questioning, prosecutors and the defense highlighted different aspects of Pierce’s testimony. Because Goldman Sachs didn’t contact clients until 4:45 p.m., which was about 50 minutes after Galleon began buying Goldman Sachs shares, prosecutors sought to bolster their claim that Gupta was Rajaratnam’s source, and not a Goldman Sachs client.

In his cross-examination of Pierce, defense attorney David Frankel emphasized that at least five people were copied on e-mails about how the firm planned to handle the secondary offering, hours before Gupta knew of it. The defense has said Rajaratnam’s source was another Goldman Sachs employee.

‘Pays Off’

Pierce, for one, sent an e-mail to his wife and to his lawyer at 5:08 p.m., before the deal was public. “Watch the tape, hard work pays off,” Pierce wrote in an e-mail Frankel showed jurors.

Frankel asked if this was before the start of the secondary offering.

“This was before the public announcement,” Pierce replied.

The deal became public at 5:49 p.m. Minutes later, Pierce’s lawyer wrote to him, “I am psyched for u stud. Well done, well done.”

Before Pierce testified, a government witness told jurors that Gupta joined a Galleon executive on a marketing trip to the Middle East and was going to be named by Rajaratnam to be chairman of a Galleon investment fund. Prosecutors offered the evidence to illustrate the close business relationship between the two men and to provide a motive for Gupta’s alleged leaks.

‘Startling Investment’

“He was going to be helping Galleon meet prospective investors,” Ayad Alhadi, a former Galleon marketing executive, said of a two-day trip he and Gupta took to the United Arab Emirates beginning on March 31, 2008. Before that trip, Alhadi said he sent an e-mail to a banker in Switzerland calling Gupta “a friend and adviser to Galleon.”

Alhadi also told jurors about a meeting in Rajaratnam’s office on March 28, 2008, where the Galleon co-founder said Gupta, who was present, “would be the new chairman of Galleon International” and responsible for investments outside the U.S.

“I think I congratulated him,” Alhadi said. Gupta may not have been officially named chairman of the fund, Alhadi said.

Alhadi testified that after the trip, one of the sovereign wealth funds he and Gupta met with on their Middle East trip agreed to invest $25 million in a Galleon fund and pledged to invest another $50 million four days after meeting them again at Galleon’s office in New York. Alhadi described this development in an e-mail to his superiors as “a startling investment.”

Among defense witnesses named by Naftalis were Rick Schutte, Galleon’s former U.S. president; Richard Feachem, former executive director of the Global Fund to Fight AIDS, Tuberculosis & Malaria; and Gregory Orman, Gupta’s financial adviser.

The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).

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