At Raj Rajaratnam’s insider-trading trial one year ago, Goldman Sachs Group Inc. (GS:US) Chief Executive Officer Lloyd Blankfein told jurors he makes unscheduled calls to the bank’s board members at times of market “uncertainty.”
Yesterday, at Rajat Gupta’s insider-trading trial, William George, an independent Goldman Sachs director, explained just how often those calls came during the 2008 market collapse, including one discussion at the heart of the Gupta prosecution.
“There were a very large number of meetings called on very short notice,” typically by telephone, George, a management professor at Harvard Business School, told jurors in Manhattan federal court. “They included a range of things.”
His testimony focused on Blankfein’s briefings, including their secrecy and last-minute nature, in September 2008 as Lehman Brothers Holdings Inc. collapsed. Gupta, 63, who was a Goldman Sachs director at the time, is accused of leaking Rajaratnam information from those meetings, and from those of Procter & Gamble Co. (PG:US)’s board, of which Gupta was also a member.
One of Gupta’s alleged tips to the hedge fund manager was about a $5 billion investment in New York-based Goldman Sachs by Warren Buffett’s Berkshire Hathaway Inc. (B:US) Prosecutors said Gupta leaked the news on Sept. 23, 2008, within minutes of learning about it in a hastily scheduled Goldman Sachs board discussion.
Gupta, who ran consulting firm McKinsey & Co. from 1994 to 2003, denies passing illegal tips to Rajaratnam, the co-founder of hedge fund Galleon Group LLC who is serving an 11-year prison term for insider trading. Gupta is accused of conspiracy and securities fraud, which carries a maximum 20-year sentence.
The two men are the biggest figures charged as part of a nationwide U.S. insider trading investigation that has involved hedge funds, banks, technology and consulting firms. Sixty-six people have been charged since August 2009 in the U.S. crackdown on illegal tipping, and 59 have pleaded guilty or been convicted at a trial. No one has won a not-guilty verdict.
George told jurors that Blankfein’s board briefings, or “posting calls,” came midweek and on weekends in September 2008, and sometimes twice on a Sunday. Directors had barely two hours’ notice before they had to dial in, according to e-mails prosecutors introduced into evidence.
As early as Sept. 14, Blankfein told his board about the Federal Reserve’s talks about Lehman, the risk that American International Group Inc. (AIG:US) might fail and Goldman Sachs’s own liquidity. For reasons that weren’t explained, Gupta wasn’t present for some of the briefings.
Of AIG, Blankfein told directors at an afternoon meeting on Sept. 14 that the insurer “was experiencing severe liquidity stress, and it wasn’t clear how long it could continue,” George recalled. It was the second discussion on that Sunday.
The board talked again Sept. 15, when Blankfein updated the independent directors about Lehman’s bankruptcy and Bank of America (BAC:US) Corp.’s acquisition of Merrill Lynch & Co., George said. There were discussions on Sept. 16 about Goldman Sachs’s third- quarter results -- diluted earnings per common share of $1.81 -- and talks again on Sept. 17, he said.
On that day, the board weighed whether Goldman Sachs might raise money in the capital markets -- “at that time, it seemed not possible,” George testified -- and whether the bank should turn to sovereign wealth funds for cash.
“There was not a favorable view of these,” George said.
Directors were more receptive to an outsider like Buffett investing. “The board seemed very open to that,” he said.
Meetings via telephone followed on Sept. 19 and Sept. 21, when directors approved a plan for Goldman Sachs to become a bank holding company. On Sept. 22, Blankfein told his board that the bank had had a relatively good day -- shares were down 6.9 percent -- compared to its peers, George said.
For prosecutors, the critical meeting came at 3:15 p.m. on Sept. 23, 2008, when Blankfein and his top aides told directors including George and Gupta about Buffett’s investment and a plan to sell an additional $2.5 billion in shares to the public, George said.
“There was a discussion of whether this would open the markets and Goldman Sachs could go into the market” to raise funds, George said of Buffett’s investment.
Gupta called Rajaratnam at 3:55 p.m., prosecutors claimed.
George recounted a call on Oct. 23, 2008, when Goldman Sachs was about to report a loss for the first time in its history and board members were hastily summoned to dial in. Prosecutors said Gupta tipped Rajaratnam about this, too.
George said he left the classroom where he was teaching and walked outside to take the call via mobile phone.
“I can remember walking out of the classroom, not stopping to talk to my students, and going to a secure place,” George said. “I went to a courtyard outside, concerned I’d miss more of the meeting because I’d already missed 30 minutes.”
George’s testimony wasn’t the first to take jurors inside Goldman Sachs. Earlier this week, Byron Trott, then vice chairman of investment banking at the firm, testified about his efforts to put together the Buffett investment.
Trott told jurors how critical he considered the deal with Omaha, Nebraska-based Berkshire after he received a phone call on Sept. 22, 2008, from Jon Winkelreid, then the co-president of Goldman Sachs.
Winkelreid “explained to me that the firm was getting ready to launch a $5 billion to $10 billion common stock offering in the next few days to raise the capital that the firm needed, it felt it needed to de-lever and continue to exist,” Trott testified May 23.
Michael DuVally, a spokesman for Goldman Sachs, declined to comment on the trial. Winkelreid didn’t return a call seeking comment.
The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).
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