Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc. (GS:US), told jurors that Rajat Gupta wasn’t authorized while he was a board member to disclose the bank’s earnings (GS:US) to outsiders before the public announcement.
Blankfein, 57, returned to the witness stand yesterday at Gupta’s insider-trading trial in Manhattan federal court. Assistant U.S. Attorney Reed Brodsky asked him whether Gupta had permission to tell outsiders what he learned at a meeting of the board’s audit committee on March 12, 2007, and other days, before the firm disclosed quarterly (GS:US) results. Prosecutors accuse Gupta of leaking the data.
“Did you authorize Mr. Gupta to disclose on March 12, 2007, any information that was learned at the audit committee meeting to any outsider?” Brodsky asked.
“No,” Blankfein said.
Gupta, 63, who ran McKinsey & Co. from 1994 to 2003, is accused of leaking inside tips to Galleon Group LLC co-founder Raj Rajaratnam. Gupta pleaded not guilty to one count of conspiracy and five counts of securities fraud, which carries a maximum term of 20 years in prison.
While Blankfein began his testimony on June 4, the trial was recessed the next day, and he attended his daughter’s high school graduation on June 6. Gary Naftalis, a defense attorney, told U.S. District Judge Jed S. Rakoff that his cross- examination of Blankfein, which is under way, will continue today.
Prosecutors will probably rest their case today, after Blankfein’s questioning concludes, Brodsky told Rakoff at the end of yesterday’s session. The judge told Naftalis that he will have to inform the court at that point if Gupta intends to take the stand in his own defense.
Gupta was a member of a Goldman Sachs board panel called the audit committee, which reviewed the firm’s financial health and routinely received briefings in advance of the full board of directors and earnings announcements, Blankfein said.
Under questioning from the prosecutor when he resumed his testimony yesterday, Blankfein said the bank’s audit committee is routinely briefed on the firm’s profits, expenses, taxes, capital and dividend before the public release of the data.
‘Lot of Speculation’
“Was the information heard at audit committee meetings confidential?” Brodsky asked.
“It was confidential in terms of organizational and management guidelines but ostensibly because the information was very important and market-moving to the stock,” Blankfein said. “There’s a lot of speculation about what results of the quarter would be. This resolves the speculation.”
Blankfein also repeated testimony he gave previously that he briefs board members frequently, with an emphasis on profits and losses, and was especially keen on doing so after he began his job in 2006.
“I think it’s Good Governance 101 to keep the board constantly informed,” he said.
One of Gupta’s alleged leaks involves a tip on Oct. 23, 2008, that Goldman Sachs would lose almost $2 a share, worse than Wall Street expected.
Earlier in the trial, jurors heard an Oct. 24, 2008, wiretap made by agents with the Federal Bureau of Investigation of Rajaratnam telling Ian Horowitz, a Galleon trader, “I heard yesterday from somebody that was on the board of Goldman Sachs that they were going to lose $2 a share.”
Brodsky yesterday showed jurors an internal Goldman Sachs weekly profit and loss report and asked Blankfein to describe what information he provided board members during briefings.
Brodsky asked Blankfein if during a call with directors on Oct. 23, 2008, he used that report, which shows, as of Oct. 17, Goldman Sachs was losing $1.96 per share.
Blankfein said the quarterly net revenue to date of the report was a loss of $171 million, the first time that the firm had ever reported a loss.
“In this particular number we have negative revenue before we even factored in the costs of running our business,” he told jurors. “That’s very, very unusual and unprecedented.”
Naftalis asked Blankfein about Gupta’s decision in September 2008 to resign from the board and work as an adviser for KKR & Co., the buyout firm co-founded by Henry Kravis and George Roberts.
Blankfein said a news release announcing Gupta’s departure was drafted and then revoked in the wake of the financial crisis. He testified that he and other Goldman Sachs officials decided to ask Gupta to remain on the board because his departure, “might be perceived as a crisis was going on at Goldman Sachs.”
While Gupta didn’t resign, Goldman Sachs gave Gupta a pair of cufflinks for his service, Blankfein said.
“A draft news release was drafted, honoring his service, which was long and good?” Naftalis asked.
“It wasn’t long, but it was good, we were honoring his service,” Blankfein said as the courtroom audience members laughed.
Naftalis turned to question Blankfein about Rajaratnam’s firm.
“I want to ask you about a company named Galleon, you’ve heard of Galleon?” Naftalis asked.
“Yes,” Blankfein answered with a bit of exasperation.
“So have we,” Naftalis said with a grimace and laughing.
Among other witnesses yesterday, an agent with the FBI testified about Galleon trading data and records of calls between phones associated with Gupta and Rajaratnam.
The agent, James Barnacle, provided details on calls and trades involving eight sets of Galleon transactions.
He was asked to review phone records of phones used by Rajaratnam and Gupta during the time period in which the FBI had a court-authorized wiretap of Rajaratnam between March and December 2008. Barnacle testified he found 150 different calls between the telephones both men used.
Only one call between Gupta and Rajaratnam was captured on wiretap, a July 29, 2008, conversation, prosecutors said.
According to Barnacle, someone using a phone line associated with Gupta’s assistant called Rajaratnam’s line at Galleon at 4:50 p.m. on Oct. 23, 2008, just 23 seconds after a call with Goldman Sachs on the same line ended.
When the stock market opened the next morning, Galleon traders sold 150,000 Goldman Sachs shares (GS:US) ahead of news that the bank would sustain losses in the quarter, the agent said. They saved $3.8 million by selling when they did, he said.
“By selling the stock on Oct. 24, the traders avoided losses in the stock because of the resulting price decline,” Barnacle told jurors.
Another tip involved Procter & Gamble Co. (PG:US), where Gupta was also on the board. Galleon earned more than $10 million on trades that prosecutors say were based on inside information, Barnacle said.
A defense attorney, David Frankel, used his cross- examination of Barnacle to try to show that the information in his charts was misleading, omits important trading data and there is no indication who was actually speaking on the calls.
Barnacle and Blankfein also testified at the insider- trading trial of Rajaratnam, who was convicted and sentenced to 11 years in prison.
The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporters on this story: Patricia Hurtado in New York at firstname.lastname@example.org; David Glovin in New York at email@example.com.
To contact the editor responsible for this story: Michael Hytha at firstname.lastname@example.org.