U.S. prosecutors rested their insider-trading case against former Goldman Sachs Group Inc. (GS:US) director Rajat Gupta shortly after the company’s chief executive officer, Lloyd Blankfein, completed his testimony.
Gupta, who ran McKinsey & Co. from 1994 to 2003, is accused of leaking secret tips to Raj Rajaratnam, co-founder of hedge- fund company Galleon Group LLC, about Goldman Sachs and Procter & Gamble Co. (PG:US), where Gupta was also a director.
“Your honor, the government rests,” Assistant U.S. Attorney Reed Brodsky told U.S. District Judge Jed Rakoff today in Manhattan federal court. Gupta is charged with conspiracy and securities fraud, which carries a maximum 20-year prison sentence.
Lawyers for Gupta, who denies wrongdoing, will now mount a defense that may center on whether others at New York-based Goldman Sachs leaked information to Rajaratnam, according to Gupta’s lawyer, Gary Naftalis. Naftalis will tell Rakoff today whether Gupta will testify in his own defense. Rakoff said today that the defense will probably conclude by June 12.
Tips in question involve earnings in the first quarter of 2007 and fourth quarter of 2008. Another involves a $5 billion Berkshire Hathaway Inc. (A:US) investment in Goldman Sachs on Sept. 23, 2008. Prosecutors also say Gupta told Rajaratnam that Cincinnati-based P&G planned to sell its Folgers Coffee unit to J.M. Smucker Co.
The trial began May 21.
Under cross-examination from Naftalis today, Blankfein agreed that senior firm executives had briefed outside analysts in July 2008 on the likelihood that Goldman Sachs would acquire a bank. The defense brought out the testimony to counter a prosecution claim that Gupta had illegally told Rajaratnam about the company’s plans on this issue.
“Items that your senior management disclose to analysts are no longer confidential?” Naftalis asked.
“Yes,” Blankfein responded.
Naftalis also attacked an allegation that Gupta leaked tips on Oct. 23, 2008, about Goldman Sachs’s unprecedented losses after learning of them at a meeting that afternoon. Naftalis had Blankfein testify that board members had probably been briefed about losses as early as Oct. 13.
Naftalis confronted Blankfein with a news article based on unnamed sources from the morning of Oct. 23 disclosing Goldman’s plans, as-yet unannounced, to cut 10 percent of its staff.
Blankfein didn’t recall the news story or the voice mail he distributed to the firm’s 32,500 employees after the report came out. In court, Naftalis had Blankfein read part of the transcript of the voice mail, including the sentence, “We regret that many of you heard of this decision from news accounts.”
Naftalis also showed Blankfein a newspaper story from July 2008 that included a photo of the CEO resting his head on his left hand. When the picture was displayed to the court on an overhead projector, Blankfein struck the same pose on the witness stand.
The courtroom erupted in laughter as Naftalis smiled and said, “Move your head down a little to the left.”
Blankfein’s testimony ran over parts of three days. Other Goldman Sachs executives who testified for prosecutors included director William George and former vice chairman of investment banking Byron Trott, the architect of the $5 billion investment by Warren Buffett’s Berkshire Hathaway.
The government also relied on testimony from a former Galleon trader, Ananth Muniyappa, and an ex-Galleon portfolio manager, Michael Cardillo.
Rajaratnam was convicted of insider trading last year and is serving an 11-year prison sentence. Unlike Rajaratnam’s trial, in which prosecutors played recordings of the defendant in wiretapped phone calls, the Gupta case is built on circumstantial evidence, including records of trades, mobile- phone call logs and business deals.
Earlier at the trial, Blankfein testified that he briefed his board over the phone on the Buffett investment beginning at 3:15 p.m. Within a minute after the call with the directors concluded at 3:53 p.m., Rajaratnam answered a call from a McKinsey conference room being used by Gupta, according to phone records and witness testimony.
Muniyappa said Rajaratnam got off a call and hurriedly told him to buy Goldman Sachs shares. Galleon bought 267,000 shares. Prosecutors played a wiretapped recording of a Rajaratnam phone call from the next day.
“I got a call at 3:58, right?” Rajaratnam could be heard telling trader Ian Horowitz. “Saying something good might happen to Goldman.”
Cardillo testified that he traded on P&G stock in 2009 after learning that Rajaratnam claimed to have a “guy” on the consumer-product company’s board.
The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).
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