Goldman Sachs Group Inc chief Lloyd Blankfein testified that a former director at Wall Street's most powerful bank violated confidentiality by leaking boardroom secrets to hedge fund manager Raj Rajaratnam.
Blankfein was called to testify by prosecutors in Manhattan federal court about Goldman's results in 2008, and a crucial investment that September by billionaire Warren Buffett at the height of the financial crisis -- secrets that prosecutors said were given to Rajaratnam.
The Goldman CEO's appearance on the witness stand for more than three hours on Wednesday intensified the focus on what is already the largest Wall Street insider trading case since the prosecutions of speculator Ivan Boesky and junk bond financier Michael Milken in the 1980s. Rajaratnam, a one-time billionaire, could face 20 years in prison if convicted.
Blankfein replied yes when prosecutor Andrew Michaelson asked whether disclosure of boardroom talks by former director Rajat Gupta went against the bank's confidentiality policies. The CEO gave his answer after a recording was played of an FBI wiretap in which Gupta and Rajaratnam discussed possible Goldman deal activity.
Rajaratnam, 53, looked pensive as Blankfein spoke. Following the end of morning testimony, Blankfein shook Rajaratnam's hand after jurors had left the courtroom.
Blankfein called Galleon a prominent client for Goldman but said he did not regularly communicate with the hedge fund. Goldman has not been accused of wrongdoing.
Prosecutors say Rajaratnam, the founder of Galleon Group, illegally made $45 million from 2003 to 2009 in stock trades based on tips from insiders, including highly placed executives in corporate America.
KEEPING INFORMATION PRIVATE
Blankfein, 56, told jurors that Gupta broke Goldman policies by telling Rajaratnam about the board's discussion in June 2008 of a possible merger with the commercial bank Wachovia Corp or an insurance company.
Asked whether American International Group Inc was under discussion, Blankfein said, I don't have a specific recollection, but it probably would have been.
Prosecutors played an FBI tap of Rajaratnam's mobile phone from July 29, 2008, in which Gupta and Rajaratnam discussed Goldman, Wachovia and AIG.
But during cross-examination, Rajaratnam lawyer John Dowd showed Blankfein press reports from June 24 and July 11 of 2008 suggesting that Goldman might buy a commercial bank.
Rajaratnam's defense is that his trades were based on his own research and publicly available information. He has vowed to clear his name at trial.
Blankfein also said it would have been confidential information that Goldman on September 23, 2008, would get a $5 billion injection from Buffett's Berkshire Hathaway Inc, given that investors would view it as a very positive sign.
He also said it would have been confidential to disclose the following month that Goldman was on its way to a surprise fourth-quarter loss, its first as a public company.
We generally make money, Blankfein said, prompting laughter from jurors and others in the crowded courtroom.
For the government to win a conviction, its evidence must convince the jury that Rajaratnam received information from someone who had a fiduciary duty to keep it secret.
Blankfein, wearing a dark suit, white shirt and blue tie, testified that it would have been fine for Gupta as a director to talk generally with outsiders, but that details of Goldman's board meetings themselves are confidential.
The U.S. Securities and Exchange Commission on March 1 accused Gupta of tipping Rajaratnam about Goldman's results and Buffett's investment. It said Rajaratnam made more than $17.5 million in illicit gains from trades on the leaks.
Gary Naftalis, a lawyer for Gupta, declined to comment on Wednesday, and repeated earlier comments that the SEC allegations are baseless. Gupta, a former worldwide managing director at the McKinsey & Co consulting firm, has countersued the SEC. He has not been criminally charged.
Two longtime friends of Rajaratnam, former McKinsey partner Anil Kumar and former Intel Corp managing director Rajiv Goel, have testified that they violated confidentiality policies by leaking company secrets to the hedge fund manager.
(A pdf file of the testimony can been seen here http://static.reuters.com/resources/media/editorial/20110324/Blankfein-Rajaratnamtestimony.pdf )