Wearing a sober suit and flashing an occasional smile, Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., appeared before a packed Manhattan courtroom Wednesday to buttress the government's case in the biggest insider-trading trial in decades.
Mr. Blankfein testified that a former Goldman director had revealed company secrets to Raj Rajaratnam, the hedge-fund titan accused of overseeing a vast illegal insider-trading ring.
The most high-profile witness to appear in the case, Mr. Blankfein told prosecutors that Rajat Gupta, a former Goldman director and previously the head of McKinsey & Co., passed confidential information to Mr. Rajaratnam in a 2008 conversation secretly recorded by U.S. authorities.
Asked whether Mr. Gupta had violated Goldman's policies by conveying the board's deliberations to Mr. Rajaratnam, Mr. Blankfein simply replied, "Yes."
By calling Mr. Blankfein to the stand, prosecutors hope to reinforce their case against Mr. Rajaratnam, who allegedly received inside information from a number of conspirators, which he used to generate $45-million (U.S.) in illegal trading profits. No allegations have been proven and Mr. Rajaratnam maintains his innocence.
Mr. Gupta, meanwhile, faces civil charges from the U.S. Securities and Exchange Commission that he passed confidential information gleaned from two board memberships - at Goldman and Procter & Gamble Co. - to Mr. Rajaratnam. A lawyer for Mr. Gupta has called the charges "baseless" and recently launched a countersuit against the SEC.
Mr. Blankfein, 56, took the stand at about 10:30 a.m. and the ensuing testimony continued until mid-afternoon with periodic breaks. Some of the questioning by prosecutors focused on a telephone call between Mr. Gupta and Mr. Rajaratnam in late June, 2008. Excerpts were played in court in which Mr. Rajaratnam, founder of hedge fund Galleon Group, asked Mr. Gupta about a rumour that Goldman Sachs might be looking to buy a commercial bank.
"This was a big discussion at the board meeting," Mr. Gupta said, before going into more detail about the deliberations.
Asked whether Mr. Gupta was authorized to confirm or deny rumours about Goldman Sachs, Mr. Blankfein said, "No."
Prosecutors also turned their attention to two other instances where Mr. Gupta is accused of passing confidential information to Mr. Rajaratnam, in one case calling the hedge-fund manager less than a minute after a conference call of Goldman directors concluded.
U.S. authorities allege that in September, 2008, Mr. Gupta told Mr. Rajaratnam that Warren Buffett, the chief executive officer of Berkshire Hathaway Inc., was making a crucial $5-billion investment in Goldman hours before it became public.
"Was [the Berkshire move]big news or small news?" a prosecutor asked Mr. Blankfein. "Big news," he replied.
Mr. Gupta also allegedly told Mr. Rajaratnam in October, 2008, that Goldman was heading for a loss in the quarter then under way, a first for the firm. The questioning surrounding that incident produced one of several moments of levity during Mr. Blankfein's testimony.
Asked to describe Goldman's profit-and-loss position in October, 2008, Mr. Blankfein appeared to stumble over his words. "We were - er, we were losing money," he said.
What was the significance of that situation, the prosecutor then asked. "We generally make money," Mr. Blankfein responded.
For the most part, Mr. Blankfein appeared cautious, replying to questions with one-word answers when possible. At one point during the cross-examination, Mr. Rajaratnam's lawyer pushed Mr. Blankfein on whether all of a board's discussions would be considered confidential, even if they concerned well-known events like the demise of Lehman Brothers Holdings Inc. "The board's reaction even to a public topic would be confidential," Mr. Blankfein said.
In another twist, Mr. Blankfein revealed that Mr. Gupta sought to announce his resignation from Goldman's board in September, 2008, just days before Lehman's collapse. Mr. Blankfein said he persuaded Mr. Gupta to stay, worried that a board member's departure would send the wrong signal at a fraught time in financial markets.
Mr. Rajaratnam sat quietly with his team of lawyers during Mr. Blankfein's testimony. The trial has entered its third week and has already featured appearances by two former friends of Mr. Rajaratnam's - Anil Kumar and Rajiv Goel - who have pleaded guilty to criminal charges and are co-operating with the government. Both men testified that they fed insider tips to Mr. Rajaratnam.
Mr. Rajaratnam's arrest in 2009 marked the start of a major assault on insider trading by the top federal prosecutor in Manhattan, Preet Bharara. So far, 46 people have been charged and 24 have pleaded guilty in several overlapping investigations.