Blankfein Takes the Witness Stand

Lloyd Blankfein, chief executive officer of Goldman Sachs (GS), checks his bank's profit every day, prefers voice mail to e-mail, and makes unscheduled calls to board members at times of market "uncertainty."

His testimony at the insider-trading trial of Raj Rajaratnam was intended to bolster prosecution claims that one of those board members, Rajat Gupta, who joined in 2006, passed on information he learned from the board. Blankfein's 3½ hours on the witness stand on Mar. 23 before a packed Manhattan federal courtroom also included a few questions about the CEO's personal life.

"We're did you grow up?" Assistant U.S. Attorney Andrew Michaelson asked Blankfein, who wore a blue tie, white shirt, and dark suit. "Brooklyn," the 56-year-old CEO replied.

"Where did you go to high school?" Michaelson asked. "Thomas Jefferson High School, East New York, Brooklyn," Blankfein said.

No other witness during the three-week trial has been asked such questions. Prosecutors painted a picture of a CEO who grew up in an outer borough of New York City and eventually ran the fifth-biggest U.S. bank by assets. Blankfein, who responded in a deferential fashion, testified he checks the firm's "p-and-l," or profit and loss, daily and relies mainly on voice mail. In times of market stress, he said he likes to have one-on-one conversations with board members. Rajaratnam's defense lawyer, John Dowd, asked Blankfein whether he was a daily reader of The Wall Street Journal.

"Sometimes I do," Blankfein testified, before hurriedly adding, "Often I do. But not always."

Most of his testimony was devoted to his conversations with Gupta, 62. Blankfein told jurors he briefed his board on the bank's losses in October 2008—the first losses ever—and the $5 billion investment in the bank by Warren Buffett's Berkshire Hathaway at about the same time.

"Was it big news or small news for Goldman Sachs?" Michaelson asked.

"Big news," Blankfein replied.

"Was the news confidential?" the prosecutor asked.

"Yes," the CEO said.

Blankfein also said that disclosing information discussed in board meetings violates company policy: "We are a public company. We don't want information about our company to get outside before the time is appropriate."

Prosecutors contend that Gupta, who hasn't been charged with a crime and has denied any wrongdoing, related board discussions to Rajaratnam, who then allegedly traded on them. Galleon Group co-founder Rajaratnam, 53, is the central figure in the largest crackdown on hedge fund insider trading in the U.S. The Sri Lanka-born money manager is accused of making $45 million from tips leaked by corporate insiders such as Gupta. He denies wrongdoing, saying he based trades on research.

Along with Goldman Sachs's outside lawyer, Karen Seymour, and other attorneys for the bank, Manhattan U.S. Attorney Preet Bharara and the chief of his securities fraud bureau, Christopher Garcia, were also in attendance for Blankfein's testimony.

As Blankfein spoke, Rajaratnam sat among two rows of defense lawyers. He listened quietly, reading documents posted on a video screen and staring at the witness. Blankfein rarely looked at the hedge fund manager, even when he testified that he visited New York-based Galleon Group "a long time ago" when he was vice-chairman of Goldman Sachs. Under questioning by Dowd, Blankfein confirmed Galleon was an important client of Goldman Sachs and that the firm ranks its clients based on who's relatively more important and less important. The CEO said he was "not sure" whether Galleon was considered a "tier-one" client.

Blankfein hesitated slightly at times during his testimony. Asked about the New York-based bank's performance in October 2008, amid what he said was the great "uncertainty" of the credit crisis, he responded haltingly. "We were losing—er, we were losing money," he said. "We generally made money."

He also briefly shared his view of Goldman Sachs's function. Asked by the prosecutor about the bank's market-making business, Blankfein said, "We're like a middleman. ... It's a service we do for the world." He then changed the last two words to "our clients."

The bottom line: Goldman Sachs's Blankfein testified that leaking board information would have been a violation of company policy.

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