Blankfein Says Gupta Present as Board Discussed Earnings

Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., said former director Rajat Gupta wasn’t authorized to disclose details of board discussions, including talks over whether to acquire an insurer.

For the second time in 15 months, Blankfein took the witness stand at a criminal insider-trading trial in New York and testified about Goldman Sachs’s policies for safeguarding confidential information and Gupta’s attendance at board meetings.

Assistant U.S. Attorney Reed Brodsky asked Blankfein whether Gupta was permitted to disclose details of board talks at a June 28, 2008, planning session in St. Petersburg, Russia, where the board discussed whether to buy a commercial bank or insurer. Blankfein answered, “No.”

“You’re not supposed to reveal the confidences of what was discussed in a board meeting,” Blankfein said. “Anything that was discussed at the board meeting is a confidential fact.”

Gupta, who ran McKinsey & Co. from 1994 to 2003, is on trial for allegedly leaking tips to Galleon Group LLC founder Raj Rajaratnam about Goldman Sachs and Procter & Gamble Co., where Gupta was also a director.

Earnings Information

The alleged Goldman Sachs tips involve earnings in the first quarter of 2007 and fourth quarter of 2008. Another involved a $5 billion Berkshire Hathaway Inc. investment in Goldman Sachs on Sept. 23, 2008.

Gupta is also accused of telling Rajaratnam that Goldman Sachs was considering buying a commercial bank or insurer, American International Group Inc. Earlier in the trial, prosecutors played a July 29, 2008, wiretapped recording of a conversation between the two men in which Gupta details the talks for Rajaratnam.

The defense says the information was already public.

Gupta, 63, who has pleaded not guilty, is charged with conspiracy and securities fraud, which carries a maximum 20-year prison sentence.

Blankfein, 57, gave similar testimony in Rajaratnam’s insider-trading trial on March 23, 2011. Rajaratnam was convicted and is serving an 11-year prison sentence. Rajaratnam and Gupta are the biggest figures caught in a nationwide insider-trading probe.

‘Loyalty and Ethics’

Brodsky began his questioning of Blankfein by asking about the firm’s corporate governance guidelines and its “loyalty and ethics” section.

“The proceedings and deliberations of the board and its committees shall be confidential,” Blankfein read aloud.

Blankfein told jurors how board meetings are organized, and he recounted his practice of briefing the board regularly.

“My thought was just to make sure they were well-informed and wouldn’t be surprised,” Blankfein testified. “I try to stay in touch with my board.”

Blankfein also told jurors about the Berkshire Hathaway investment, saying he learned of it after arriving on a midday flight in Washington on Sept. 23, 2008. After speaking to others at his firm, Blankfein said he called Berkshire Hathaway Chairman and Chief Executive Officer Warren Buffett, who wanted Blankfein’s agreement to various conditions.

Deal Approved

Blankfein briefed his directors on the Buffett investment beginning at 3:15 p.m., and the board approved the deal, Blankfein said. Prosecutors say within a minute after the board call concluded around 3:55 p.m., Gupta tipped Rajaratnam about the news.

Blankfein said Buffett wanted to resume discussions at 4:15 p.m. about another part of the investment -- the price at which he had a right to buy Goldman Sachs stock. A press release was issued at 5:29 p.m. that evening, Blankfein said.

Brodsky also asked Blankfein about a “board posting call” on Oct. 23, 2008. It was the first time Goldman Sachs would report a loss in the firm’s history as a public company, Blankfein said.

“The purpose was to let the board know what our results, that our results were poor to what the world at large was thinking,” Blankfein testified. “We were losing money in the quarter. The analysts still had us making money.”

Much of Blankfein’s testimony was about Goldman Sachs’ earning projections in 2007 and 2008, as he reviewed numerous investor reports. As he left the witness stand during a break, Blankfein stopped, looked over at Gupta and nodded to him.

Gupta didn’t show any reaction.

Graduation Lunch

Blankfein is scheduled to resume his testimony on June 6 after attending his daughter’s graduation and a luncheon for students and their families. The trial is recessed today because U.S. District Judge Jed Rakoff, who is presiding over the trial, will give a speech in Washington.

Blankfein will be cross-examined by Gupta’s lawyers after he finishes his testimony for the prosecution.

Rakoff took over questioning of Blankfein on several occasions yesterday, outside the jury’s presence at the end of the day, even asking Blankfein where the graduation luncheon was to be held. Blankfein said he thought he’d have difficulty getting back to the courthouse in lower Manhattan because the meal was being held in Yonkers.

“Yes, I live in Yonkers,” Rakoff said, and asked the name of the restaurant.

“It’s in Yonkers, I think you know it,” Blankfein said.

“If it’s the one I am thinking of, I can’t afford it,” Rakoff replied.

Making a Choice

As he left court, Blankfein was asked how he felt about having to choose between testifying and attending his daughter’s graduation.

“There’s no one I’m more afraid of than my wife and daughter,” he said, adding that the path of least resistance was choosing them over meeting court schedules.

Before Blankfein took the witness stand, Anil Kumar, a former McKinsey partner who was a protege of Gupta’s, told jurors about the relationship between Gupta and Rajaratnam.

Kumar said Gupta had invested $10 million in the Galleon Voyager Fund in 2008, Rajaratnam invested $40 million, and the two borrowed $300 million from Lehman Brothers Holdings Inc. for the fund.

“He said that the $10 million had almost doubled in size over the years,” Kumar said of Gupta.

Later, the fund was wiped out in the 2008 stock market collapse, angering Gupta and prompting him to consider filing a lawsuit because of what he said was Rajaratnam’s mismanagement of the fund, Kumar said.

Withdrew Money

Gupta later showed up at Kumar’s apartment in February or March 2009, Kumar said after learning Rajaratnam had withdrawn money from the fund without Gupta’s consent or knowledge.

“He said he’d discovered something that was quite distressing,” Kumar testified. “Rajaratnam had removed some of the money for the fund for himself,” Kumar said, adding, “Mr. Gupta said ‘This is plain wrong, this is worse than not managing the money well, it’s taking money out.’”

Prosecutors noted that the litigation threat didn’t come up until 2009, which was after Gupta allegedly provided illegal tips to Rajaratnam as late as January 29, 2009.

On cross-examination of Kumar, defense attorney Gary Naftalis sought to show that the relationship between Gupta and Rajaratnam had deteriorated as early as 2007, suggesting that Gupta had no motive to leak inside tips to Rajaratnam.

Kumar testified that Gupta hadn’t been invited to Rajaratnam’s birthday party in Kenya in 2007.

The defense also asked Kumar about Gupta’s threat to sue over the losses in the Voyager Fund as a reason why he wouldn’t leak inside information to Rajaratnam in 2008.

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

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