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The friendship between Rajat Gupta, a former Goldman Sachs Group Inc. (GS) director, and Galleon Group LLC founder Raj Rajaratnam took center stage this morning at Gupta’s insider-trading trial, as prosecutors prepared to summon Goldman Sachs Chief Executive Officer Lloyd Blankfein to testify.
Blankfein will testify as a government witness today, U.S. District Judge Jed Rakoff said during a break in the testimony. Blankfein, who was scheduled to testify on June 6, will take the stand this afternoon because of a scheduling conflict with his daughter’s graduation.
Michael DuVally, a spokesman for Goldman Sachs, declined to comment on Blankfein’s testimony or his schedule.
Prosecutors concluded their questioning of Anil Kumar, a former McKinsey & Co. partner, who told jurors in Manhattan federal court about the friendship 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. The litigation threat didn’t come up until 2009, which was after Gupta allegedly provided illegal tips to Rajaratman, Kumar said.
“Mr. Gupta said Mr. Rajaratnam had an ethical and moral responsibility to Mr. Gupta because he had not held up to his side of the management of the fund,” Kumar said of Gupta’s comments to him in 2009. “Since Mr. Rajaratnam had lost all the money, Mr. Rajaratnam had a moral and ethical responsibility to make Mr. Gupta whole.”
Gupta, who ran McKinsey & Co. from 1994 to 2003, is on trial for leaking tips about Goldman Sachs and Procter & Gamble Co. (PG), where he was also a director. One of the alleged tips involved a Berkshire Hathaway Inc. (B) investment in Goldman Sachs. Prosecutors say Gupta tipped Rajaratnam after learning about the deal in a Goldman Sachs board meeting at 3:55 p.m. on Sept. 23, 2008.
Rajaratnam and Gupta are the biggest figures caught in a nationwide insider-trading probe. Gupta, who has pleaded not guilty, is charged with conspiracy and securities fraud, which carries a maximum 20-year prison sentence.
On cross-examination of Kumar, defense attorney Gary Naftalis sought to show that there wasn’t a close relationship between the two men, suggesting that Gupta had no motive to leak inside tips to Rajaratnam.
Kumar testified, under questioning from Naftalis, that Gupta didn’t attend Rajaratnam’s 50th birthday celebration in Kenya and that Gupta’s attention was focused primarily on the Indian School of Business, which Gupta and Kumar co-founded.
The defense has pointed to 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. In cross-examination, Kumar testified that Gupta had complained in 2008, before the 2009 lawsuit threat, that Rajaratnam had “dropped the ball” in managing the fund.
“He’s generally a calm guy,” Kumar said of Gupta. “That’s quite a bit of money to lose.”
Gupta eventually concluded that Rajaratnam had taken money out of the Voyager account without telling him, Kumar said.
“He was very annoyed,” Kumar testified. “He told me he was about to sue Mr. Rajaratnam.”
The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).
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