Goldman Sachs Group Inc. (GS:US), just months after being assailed by an ex-employee for harboring a “toxic” culture, faces a harsh spotlight this month in Manhattan federal court over how well a senior official guarded its secrets.
Rajat Gupta, a former Goldman Sachs director, goes on trial May 21 on charges of giving inside information to Raj Rajaratnam, the Galleon Group LLC co-founder serving 11 years in prison for insider trading. Gupta’s lawyers said they may point to others at the bank who passed Rajaratnam illegal tips. At least three other Goldman Sachs employees are said to be under investigation related to Galleon insider trading.
The renewed scrutiny of Goldman Sachs comes after the firm endured a wave of publicity that drove down its stock price in the short term. Most recently, former derivatives trader Greg Smith in a March New York Times opinion piece criticized the company’s treatment of clients. Goldman Sachs’s market value fell $2.15 billion the day it was published.
Earlier this year, a Delaware judge criticized the New York-based company’s handling of El Paso Corp.’s takeover by Kinder Morgan (KMI:US) Inc. In 2010, U.S. Senator Carl Levin called hearings on the financial industry, and the bank settled a Securities and Exchange Commission lawsuit for $550 million.
“It’s almost more like the Chinese water torture,” said William D. Cohan, author of “Money and Power: How Goldman Sachs Came to Rule the World.” “There’s a cumulative effect -- not only this trial and this incident but what the judge in the Delaware Chancery Court wrote about El Paso-Kinder Morgan, Senator Levin’s all-day hearing, the SEC lawsuit, the relentless pounding in the media, the Greg Smith thing.”
Goldman Sachs’s revenue may not suffer, because clients will continue to turn to the New York-based company, Cohan, a Bloomberg View columnist, said in a telephone interview. The bank has outperformed the S&P Financials Sector Index this year.
Michael DuVally, a spokesman for Goldman Sachs, the fifth- largest U.S. bank by assets, declined to comment on how it will handle publicity from a monthlong Gupta trial.
Since Levin, a Michigan Democrat, alleged in 2010 that the firm put its own interests ahead of clients’, Goldman Sachs has come under persistent criticism.
In July 2010, Goldman Sachs agreed to pay $550 million to resolve SEC allegations that it misled investors in collateralized debt obligations linked to subprime mortgages by not disclosing that hedge fund Paulson & Co. helped pick the underlying securities and then bet against them. Goldman Sachs didn’t admit wrongdoing. Fabrice Tourre, a Goldman Sachs trader who was also sued in the case, is fighting the SEC’s allegations.
Delaware Chancery Court Judge Leo Strine rebuked Goldman Sachs in February for advising El Paso (EP:US) after Kinder Morgan, in which it held a $4 billion stake, bid for the company. The judge, who questioned the bank’s handling of an alleged conflict of interest, didn’t block the deal, which is expected to close in the second quarter.
Smith quit in March after writing an opinion piece in the New York Times describing a “toxic and destructive” culture, a claim Goldman Sachs denies. The shares (GS:US) fell 3.4 percent in New York trading after the article ran.
In an April 25 interview with Bloomberg Television, Chief Executive Officer Lloyd Blankfein addressed the damage the company’s reputation has sustained in recent years.
“Shame on us,” Blankfein said, for “not anticipating” how the public would perceive the firm after the financial crisis.
“We’re going to have to do a better job -- we’re going to have to do a job -- in getting out there in telling people how important this industry is and what it does when we advise companies on their growth plans, when we help finance those growth plans, when we manage their assets for them, and how important this is for the economy, the markets and obviously society at large,” Blankfein told Bloomberg TV’s Erik Schatzker on “InBusiness With Margaret Brennan.”
Gupta’s trial will be first in a nationwide crackdown on insider trading that started with Rajaratnam’s case in 2009 to focus squarely on Goldman Sachs. Gupta is accused of tipping Rajaratnam, his one-time friend and business partner, about the bank and Procter & Gamble Co. (PG:US), where Gupta also served as a director. Gupta ran consulting firm McKinsey & Co. from 1994 to 2003 and was on the Goldman Sachs board from 2006 to 2010.
Tips included details of Goldman Sachs’s earnings in the first quarter of 2007 and fourth quarter of 2008, as well as the $5 billion investment in the bank by Berkshire Hathaway Inc. (B:US) in September 2008, prosecutors said. The leaks generated “illicit profits and loss avoidance” of more than $23 million, the SEC alleged in a related lawsuit. Gupta, who denies wrongdoing, faces as long as 20 years in prison if convicted of securities fraud and conspiracy.
Brad Hintz, an analyst at Sanford C. Bernstein & Co., said there’s “no evidence whatsoever” that Goldman Sachs’s investment banking franchise is at risk from the Gupta case. At the same time, clients will be watching to see who might have breached a duty to the firm by leaking confidential information.
“So long as this does not come from senior people -- managing directors and above -- the damage is manageable,” Hintz said in a telephone interview. “If it comes above that, then you end up with a reputational damage that can affect a willingness of the clients to engage you.”
Gary Naftalis, Gupta’s lawyer, has said in court that prosecutors told him two other Goldman Sachs employees are suspected of leaking tips about companies including Apple Inc. (AAPL:US) and Intel Corp. (INTC:US) Naftalis said one was an executive caught on a wiretap talking to Rajaratnam. Without naming the person, Naftalis said the defense may present evidence of the other tippers at Gupta’s trial.
Jerika Richardson, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan, declined to comment on the case. Paul Fox, a spokesman for Cincinnati-based Procter & Gamble, didn’t immediately return calls for comment.
Bradley Simon, a former federal prosecutor now in private practice in New York, said the disclosure of other possible leakers is a “gift” to Gupta that Naftalis is sure to exploit.
“The government has to remove almost all doubt,” he said in a telephone interview. “How do you know it wasn’t one of these individuals instead of Gupta? It does pose a problem for the government if the jury says, ‘We’re not totally sure.’ Then they’re obligated to acquit.”
Two other Goldman Sachs employees -- David Loeb, head of Asia Equity Sales in New York and a managing director, and Henry King, a technology analyst in Hong Kong -- are under U.S. investigation, according to people with knowledge of the probes who weren’t authorized to speak publicly. It’s unclear if Loeb or King are the employees referred to by Naftalis and in letters prosecutors filed in court.
Loeb and King didn’t respond to e-mails seeking comment. Goldman Sachs has declined to comment on Loeb and King.
A third employee, Matthew Korenberg, a managing director based in San Francisco, has been the subject of a U.S. insider- trading investigation for 2 1/2 years related to Galleon, said his lawyer, John Hueston. Korenberg remained employed by Goldman Sachs and has never been investigated for passing tips to Rajaratnam, Hueston said in an April 26 interview.
Goldman Sachs has “fully cooperated” with federal authorities for more than two years on the Korenberg probe, the company said in an April 26 statement.
“The multiyear investigation that he has been involved with has resulted in nothing,” Hueston said. “He has never tipped any information. He was never alleged to have tipped any inside information. He has had a distinguished career at Goldman Sachs.”
Frank Razzano, a Pepper Hamilton LLP lawyer not involved in any Galleon-related insider-trading cases, said Gupta’s defense may benefit from multiple Goldman Sachs executives being implicated in leaking information.
“It’s a very good case if you can come forward with evidence to show that the government got the wrong person,” said Razzano, who is among the few defense attorneys in the U.S. to win a client’s acquittal in an insider-trading case.
Jurors are likely to hear from Goldman Sachs executives, court papers indicate. Blankfein testified at Rajaratnam’s trial last year that Gupta violated the firm’s confidentiality policies by allegedly telling Rajaratnam about the firm’s earnings and strategic plans.
In the SEC lawsuit, Gupta’s lawyers have said that Blankfein, Chief Financial Officer David Viniar, President Gary Cohn, Loeb and retiring Lead Director John Bryan may have information “relevant” to the defense. Another possible witness is Goldman Sachs director Claes Dahlback, a former CEO of Sweden’s Investor AB, who was interviewed by the government, prosecutors told a judge in January.
Naftalis declined to comment on his possible witnesses.
Goldman Sachs’s relationship with Galleon may also come into view. Gupta is alleged to have tipped Rajaratnam in 2007 after listening to a Goldman Sachs board meeting while at Galleon’s offices. Jurors may hear that Goldman Sachs routinely catered lunch for Galleon traders, as the bank did for other big clients, according to an ex-Galleon employee who declined to comment publicly.
Anthony Sabino, a lawyer and professor at the Peter J. Tobin College of Business at St. John’s University in New York, said the publicity will sting even if it doesn’t cost the firm business.
“If you want to do a deal these days in the U.S., you go to Goldman, you go to Morgan Stanley,” he said in a telephone interview. “But when you have multiple instances, then people may say it’s indicative of a lack of internal controls or a permissiveness that lets this thing go on. It’s a slap in the face to management.”
Ronn Torossian, CEO of 5W Public Relations LLC in New York, which has done work for Coca-Cola Co. (KO:US) and McDonald’s Corp. (MCD:US), said Goldman Sachs should move quickly to reclaim its reputation.
The company should stress to the public that recent events involve just a few of its 32,000 employees and that it demands that all employees act ethically, he said. Workers must be “completely above-board,” he said, not even “cheating in their pickup basketball games.”
“Any time you have a stellar firm like that and the words ‘insider trading’ next to it -- you start to wonder how long does it go, how much more is there?” he said in a telephone interview. “It’s hard to distance yourself from crisis.”
The case is U.S. v. Gupta, 11-cr-907, U.S. District Court, Southern District of New York (Manhattan).
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