A-List Witness at Gupta Inside-Trading Trial

MANHATTAN (CN) - Goldman Sachs CEO Lloyd Blankfein testified Monday how the collapse of Lehman Brothers interrupted the planned resignation of a Goldman director, who stands trial for his alleged role in history's largest insider-trading ring.

Prosecutors say financier Rajat Gupta gleaned sensitive plans as a member of the boards of Goldman Sachs and Procter & Gamble, and then passed the information along to fallen Galleon hedge fund billionaire Raj Rajaratnam, who is serving an 11-year sentence for various securities fraud charges.

Blankfein did not connect Gupta to Rajaratnam's scheme on Monday, but he explained how one of Gupta's legitimate business dealings could have complicated his ethical obligations to the bank.

When the private equity firm of Kohlberg Kravis Roberts offered Gupta a position in early fall 2008, Blankfein said he worried that Gupta's association with both companies "would create conflicts."

"The prevailing feeling at the time was that would be hard to do," Blankfein said, adding that the board planned for Gupta to make a graceful exit.

"We weren't negative about it," he said. "He remained in good feeling with the other board members."

But Goldman never sent out the press release it drafted on Gupta's resignation because Lehman Brothers went bankrupt around the same time.

The shock of that collapse on the market made it a bad time to announce a shake-up to the Goldman Sachs board, Blankfein explained.

"As a result of that, I asked Rajat to withdraw his resignation and stay on the board," he said.

Blankfein said Gupta may have nevertheless accepted the new position while continuing to work on the Goldman Sachs board.

The CEO also testified about the intense secrecy surrounding Goldman dealings.

"The fact that anything was discussed in a board meeting is itself a confidential fact," Blankfein said.

In one Sept. 23, 2008, phone conference with St. Petersburg, Russia, executives discussed whether Goldman should buy a commercial bank.

Prosecutors say Gupta told Rajaratnam about this discussion shortly after the meeting, and jurors heard a wiretapped phone call of the conversation.

Questioning Blankfein, Assistant U.S. Attorney Reed Brodsky asked if Gupta was authorized to disclose any part of the board meeting at St. Petersburg, Russia?"

"No," Blankfein replied.

Another witness, McKinsey & Co. executive Anil Kumar, told the court how a joint investment into Galleon's Voyager fund soured Rajaratnam and Gupta's friendship.

After losing every penny of his $10 million investment, Gupta had said Rajaratnam "dropped the ball," Kumar confirmed.

"He's quite a calm man, generally," Kumar said, referring to Gupta. "He tends not to get ruffled."

Expressionless throughout trial, Gupta watched the questioning with neatly trimmed hair and thin eyeglasses.

Defense attorney Gary Naftalis pressed Kumar about how Gupta lost his cool after learning that Rajaratnam allegedly embezzled from him.

"He told you that Mr. Rajaratnam had taken money out of the account behind Mr. Gupta's back?" Naftalis asked.

"That's what he told me, sir," Kumar replied. "He was very annoyed. He was emphatic, which was unusual for him, and he said he was ready to sue."

Throughout trial, prosecutors have tried to implicate Gupta in Rajartnam's crimes, while defense attorneys have tried to distance the men.

Blankfein and Kumar both testified against Rajaratnam last year.

Naftalis stressed how jurors and other observers will perceive differences in the two cases.

At the close of the day, U.S. District Judge Jed Rakoff mapped out the end of the prosecution's case.

Tuesday were adjourned because Rakoff had a personal scheduling conflict.

Blankfein's schedule will also interrupt proceedings on Wednesday, when he will attend his daughter's high-school graduation in Yonkers. He said that a luncheon follows the ceremony.

Rakoff, a Yonkers resident, quipped, "If it's the one I'm thinking about, I can't afford it."

The prosecution is expected to rest their case after Blankfein's testimony continues on Thursday.

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