MANHATTAN (CN) – Goldman Sachs CEO Lloyd Blankfein testified Wednesday in the trial of billionaire Galleon co-founder Raj Rajaratnam, who is accused of making $45 million as the ringleader of the largest insider-trading scheme in history.
The government’s ensuing investigation has brought guilty pleas from more than 15 alleged associates and tipsters, including former Intel executive Rajiv Goel, whose testimony was interrupted Wednesday to accommodate the bank chief’s schedule.
Word of Blankfein’s testimony caused the courtroom to fill beyond capacity, and spectators even scrambled to find space in the benches of the brimming room.
Prosecutors called Blankfein to testify because a former Goldman Sachs board member, Rajat Gupta, allegedly leaked information about possible major investments and acquisitions that the bank was expecting.
The government played a July 29, 2008, wiretapped conversation as evidence of one such leak, in which Gupta appears to tell Rajaratnam that Goldman Sachs considered purchasing Wachovia Bank and AIG. (Click here to download the full audio, a nearly 18-minute file.)
“If Wachovia was a good deal and they, you know, it’s quite conceivable they’d come and say, ‘Let’s go buy Wachovia,'” Gupta, a former McKinsey executive, is recorded as telling Rajaratnam. “Or even AIG,” he added
“This was a big discussion at the board meeting,” Gupta said on the tapes. “It was a divided discussion.”
Blankfein said that the board meeting to which Gupta had referred took place in St. Petersburg, Russia, at the end of June. He added that it was the first time he had the recording.
Asked if the board’s discussion was confidential, Blankfein replied, “Most definitely, yes.”
Blankfein also discussed Warren Buffett’s proposed $5 billion investment into Goldman Sachs, which was expected to bolster the bank’s reputation amid the September 2008 financial meltdown.
“[Buffett] has a reputation as a savvy and successful investor,” Blankfein said. “That was an endorsement of a kind.”
Prosecutors say that Rajaratnam received a tip about that investment and about the bank’s surprising losses in October 2008.
Blankfein was terse about the “significance” of the losses. “We usually make money,” he said.
Rajaratnam’s defense attorney John Dowd began cross-examination by picking up the thread he started during opening statements, suggesting that it was the Troubled Asset Relief Program’s injection of $10 billion into Goldman Sachs, rather than Buffett’s investment, that spurred Rajaratnam investment choices.
Blankfein torpedoed that theory on redirect by stating that Goldman Sachs accepted Buffet’s offer because it was not waiting for TARP to pass.
“The government didn’t charge nearly as much as Buffett did,” Blankfein said, to laughter in the courtroom.
Dowd also said that, while Goldman Sachs’ unprecedented quarterly losses in October 2008 were not publicly known, there were many indications that they were predictable.
The Wall Street Journal speculated around the same time that there would be a future 10 percent reduction in the bank’s workforce.
Bloomberg reported that the Chinese bank ICBC, in which Goldman Sachs had placed a multimillion-dollar investment, performed poorly that quarter.
But Blankfein countered that even such a sizable investment would not impact Goldman Sachs’ profits and losses.
Goldman Sachs had more than a trillion dollars on its balance sheet that month, the chief executive said.
Blankfein continued that there is a difference between press speculation and the knowledge of his board members.
“Speculation is people guessing what the company is going to do – the board knows what it is going to do,” Blankfein said.
Owen O’Keeffe, an investment banker with the tech group at Morgan Stanley, took the stand on Wednesday afternoon. Assistant U.S. Attorney Jonathan Streeter asked O’Keefe about his supervisor at Morgan Stanley, managing director Kamal Ahmed, who prosecutors say informed Rajaratnam about acquisitions that the bank helped execute.
The first alleged tip was related to the 2005 IT merger of Integrated Device Technology and Integrated Circuit Systems. The second event, announced a year later, was the merger of computer-processor company Advanced Micro Devices (AMD) and graphics chip maker ATI Technologies. The last involved a prospective acquisition involving Vishay Technology that never finalized.
During cross-examination, O’Keeffe repeated that he could not recall whether Ahmed worked on the AMD deal, as he had told the FBI.
Rajaratnam’s defense attorney Terence Lynam argued that Morgan Stanley’s confidentiality agreement showed that the line between confidential and nonpublic information is often blurry. The confidentiality agreement, Lynam said, instructed employees to consult the legal department for “complex” questions regarding confidential disclosures.
Streeter rejected the idea that the confidentiality issues involved in these transactions were so obscure. He asked O’Keeffe if he would need to consult the legal department to determine whether he could tip a friend about an acquisition that had not yet been announced.
“That situation is not complex,” O’Keeffe answered, prompting laughter in the courtroom.
Rajiv Goel is expected to resume testimony on Thursday.