NEW YORK (AFP) – Goldman Sachs boss Lloyd Blankfein took to the stand Wednesday, telling jurors at a high-profile insider trading trial that one of the storied bank’s ex-directors leaked sensitive company secrets.
Blankfein admitted former Goldman director Rajat Gupta broke the firm’s confidentiality rules by giving on-trial hedge fund manager Raj Rajaratnam an inside take on the bank’s possible acquisitions.
Rajaratnam, who worked for the Galleon Group, is accused by the government of creating a corrupt network of informants to rack up millions of dollars in fraudulent profits.
Blankfein appeared in a somber dark suit and blue tie before the New York court, where he heard a recording of Gupta and Rajaratnam discussing rumors that Goldman’s board “might be about to buy a commercial bank.”
“This was a big discussion at the board meeting,” Gupta said during a 2008 call, which was secretly taped.
“It was a divided discussion,” he said, adding that he would be “extremely surprised if anything is imminent.”
After being played the recording, Blankfein was asked if Gupta had broken the company’s confidentiality policies.
“Yes,” Blankfein replied.
Rajaratnam’s lawyers argued their client was just doing his job, trying to clarify information that was already circulating in the press.
Blankfein’s appearance in court as a government witness provided jurors with a rare look inside one of Wall Street’s most secretive firms.
The case is being eagerly watched by traders, as much for its personality theater as for new guidelines on what constitutes insider trading.
Earlier in the proceedings, US assistant attorney Jonathan Streeter said Rajaratnam “cheated” to benefit from illegal insider tips even as the US financial sector was in meltdown in 2008.
But defense attorney John Dowd countered that the Sri Lankan-born 53-year-old was nothing more than a brilliant entrepreneur whose Galleon hedge fund used legal, public information and “the best research in the business.”
The government case rests largely on wire-tap conversations allegedly showing Rajaratnam cultivating illegal information, and the testimony of former associates and colleagues who have already been convicted and are cooperating with the government.
Gupta, who was also a Procter Gamble director, is accused by the Securities and Exchange Commission of giving Rajaratnam “information about the quarterly earnings at both firms, as well as an impending $5 billion investment by Berkshire Hathaway in Goldman.”
The watchdog described Gupta as “a friend and business associate of Rajaratnam.”
Gupta, a Connecticut-based business consultant and former managing director of global consulting firm McKinsey Company, was also accused of being a direct or indirect investor in at least some of Rajaratnam’s Galleon hedge funds.
When Marcone Supply bought a competitor last year, it looked
like the sort of low-risk deal that happens all the time in
unglamorous industries like appliance parts.
Marcone, a 79-year-old parts distributor in Creve Coeur, was
already No. 1 in its industry. Several previous acquisitions had
extended its geographic reach, and buying Buffalo-based AP Wagner
would solidify its position in the Northeast.
A few months after the deal closed, however, Marcone noticed
that many of Wagner’s best customers were no longer placing orders.
A few months after that, Marcone filed a lawsuit accusing two
former employees and a competing company, Detroit-based 1st Source
Servall, of corporate espionage.
The trouble, Marcone Vice President David Ganz says, is that the
list contains much more than names and addresses. It had data on
past orders, pricing and credit history.
Somebody with access to that data could quickly set up a
competing operation and grab Marcone’s best customers. And that,
the lawsuit alleges, is just what Servall did.
The Detroit company, which didn’t have much presence in the
Northeast before, hired Karl Rosenhahn and Mark Creighton, the two
former Wagner executives who are co-defendants in Marcone’s suit.
After they began using the list, Ganz says, Marcone identified 640
customers whose orders dried up. The loss of sales, he says,
amounted to $12 million last year.
Marcone’s suit doesn’t specify a damage amount, and no trial
date has been set. New York Justice John Michalek did, though,
issue an order last month that prohibits Servall from soliciting
business from Marcone’s customers. A New York appellate court
upheld the order on March 10, with a modification that allows
Servall to accept unsolicited orders from those customers.
Servall issued a statement calling the appellate ruling “a
significant victory” and saying that it wants to serve “customers
impacted by Marcone’s recent poor service and price gouging.”
Ganz, the Marcone executive, points out that it’s Servall
employees who have admitted unethical behavior. Rosenhahn and
Creighton first denied that they had taken any confidential
information, then admitted the theft after Marcone got court
permission to examine their computers.
Ganz also says that Marcone reduced some of Wagner’s prices,
kept most of its employees and invested more than $1 million in its
offices and warehouses. The merger wasn’t, in other words, a
slash-and-burn deal.
“It should have strengthened both entities,” he said. “Last
year, instead of being kind of a fun year with new people and new
locations, it wasn’t comfortable and it wasn’t fun.”
Michael Moberly, a security consultant and founder of Knowledge
Protection Strategies in University City, says information-theft
cases like this are not unusual. “We have this natural tendency to
want to trust our employees; we want to trust everybody,” he
said.
The highest-profile cases, Moberly says, involve high-tech
companies whose employees spirit away a key software program or a
new microchip design. But all companies — even those whose business
revolves around mundane things like hoses and dishwasher racks —
have valuable know-how and customer-relationship data.
And, as Marcone learned the hard way, information in the wrong
hands can do a lot of damage.
Middleware giant Software AG conducted an elaborate corporate espionage scheme replete with “sex, lies and an audiotape,” according to allegations in a lawsuit filed by RFID (radio frequency identification) vendor GlobeRanger.
GlobeRanger, of Richardson, Texas, “poured a decade of work and tens of millions of dollars into developing technology that is truly transformative and promised to exponentially facilitate the flow of goods and information throughout the world,” according to its complaint, which was originally filed in a Dallas County, Texas, court in December and moved to federal court this month.
Software AG, which dwarfs GlobeRanger in size, “had an irresistible motive,” the complaint adds. “It stood to make hundreds of millions of dollars from stealing GlobeRanger’s technology and attaching it to a product already deployed in tens of thousands of companies worldwide.”
RFID technology is not new, GlobeRanger’s complaint notes. But its platform is “a true chameleon” that can be deployed in any enterprise within two to three months, it claims.
Its products are used to track crime scene evidence in Holland and monitor the removal of hazardous materials from a Tennessee nuclear site, the complaint states. It even “knows just where ‘your dollop of Daisy’ sour cream is between farm and market.”
GlobeRanger has also won contracts making it “the enterprise standard” for the U.S. Defense Logistics Agency and the U.S. Air Force, according to the complaint.
Software AG’s April 2007 purchase of middleware vendor WebMethods for US$546 million is at the root of the conspiracy alleged in GlobeRanger’s filing.
“WebMethods was worth so much because it is literally everywhere — in every industry, every sized enterprise,” the complaint states. An integration between RFID technology and WebMethods would constitute a “holy grail” and a “massive home run” for Software AG, it adds.
However, WebMethods was not developed with RFID in mind, according to the complaint.
Now with WebMethods in hand, it would be years before Software AG could develop a viable RFID product, leading the company to make a brazen move, according to the complaint.
“Software AG had just spent a half a billion dollars. It had to show returns on this investment,” it states. “Software AG decided that it would develop an RFID Solution through corporate espionage.”
GlobeRanger’s complaint also names two systems integrators it had worked with, Main Sail and Naniq Systems, as defendants.
A director at Naniq, Kim Gray, “was unusually successful” at winning contracts from the Navy’s Automatic Identification Technology Office, according to the complaint, which said, “She was also having an improper relationship with Bob Bacon, the married head of Navy AIT.” Gray was also “involved with a man at Software AG,” it alleges.
Seoul (The Korea Herald/ANN) – South Korea concluded Friday (March 25) that the recent sex scandal involving several of its officials in Shanghai and a young Chinese woman was not a case of espionage, avoiding diplomatic fallout with China which has been closely monitoring the investigations.
Several officials, including former Consul General Kim Jung-ki, underwent government investigation over allegations they leaked confidential state information to a married Chinese woman while working in Shanghai.
Deng Xinming, the 33-year-old housewife at the center of the scandal, disappeared from the public eye after news broke earlier this month, also avoiding a probe by the Seoul investigation team which had been in Shanghai last week.
“We recognize this case as an incident caused by serious indiscipline of officials at overseas missions, which led to leakage of some state information, illegal visa issuances and inappropriate relationships,” Kim Seok-min, deputy minister of SeoulÂ’s Prime MinisterÂ’s Office, said in a news briefing.
Officials had made the mistake of conducting “anomalous diplomacy relying on unofficial and inappropriate sources” such as the accused Chinese woman and were found to have had inappropriate relationships at hotels in China, Kim said, adding that more than 10 related officials will be punished.
Deng appears to have approached the Korean officials mainly for help with visa issuances. About 19 state documents did leak via the Shanghai mission, but none of them are considered information that calls for legal action, the Prime MinisterÂ’s Office said.
Korean officials at the Shanghai mission were initially suspected of passing classified government files to Deng, which were said to include contact information of some 200 high-ranking Korean officials and the schedule of President Lee Myung-bak.
When the scandal was first reported earlier this month, some speculated that Deng was an A-class spy hired by her government, citing her wealth and way of dealing with men.
The Chinese government expressed regrets about Seoul turning the incident into a spy case, its main newspaper warning of negative effects on Seoul-Beijing ties unless the case was “quietly dealt with” in an editorial.
After the government investigation results were made public, the Foreign Ministry said it would “sternly deal” with the officials involved, including former consular chief Kim.
The ministry also said it would conduct stricter inspection of its officials at overseas missions and recall anyone with disciplinary problems.
The latest scandal was unveiled shortly after the Foreign Ministry announced a set of reform measures to overcome a nepotism scandal that led to the resignation of its minister, dealing another blow to the ministry often considered an organization of elites.
NEW YORK (Reuters) – Galleon hedge fund founder Raj Rajaratnam, the central figure in the biggest U.S. insider trading case in a generation, went to trial on Tuesday in a showdown with prosecutors that will feature wiretap evidence and the testimony of former friends and associates.
Onetime billionaire Rajaratnam, 53, was mobbed by photographers and TV crews when he stepped from a black suburban SUV and walked into Manhattan federal court. Dressed in a brown coat and a suit, he was escorted by one of his lawyers.
He sipped black coffee in the courthouse cafeteria, declining to comment to reporters. He then went to the courtroom where about 150 potential jurors were to be questioned by U.S. District Judge Richard Holwell.
Opening statements will start once the 12-member panel is in place for a trial expected to last up to two months.
Rajaratnam is the former head of Galleon Group, which once managed $7 billion. He could face a 20-year prison sentence if convicted on the most serious charge of securities fraud.
Since arresting Rajaratnam in October 2009 and announcing criminal charges against 26 former traders, executives and lawyers, the U.S. government has pressed ahead with what it calls the biggest probe of insider trading in the $1.9 trillion hedge fund industry.
Prosecutors allege Sri Lankan-born Rajaratnam made $45 million in illicit profits through tips from former friends and associates. Nineteen people have pleaded guilty in the case, which stands apart from past insider trading probes because of the government’s wide-scale use of phone taps.
A questionnaire asks potential jurors more than 50 questions aimed at weeding out potential bias against the financial industry and concerns about the economic crisis.
The case “does not have anything to do with the recession or who is to blame for the financial problems we face,” the questionnaire reads.
It goes on to ask, “Does the fact that the case involves the financial industry, Wall Street executives, hedge funds, mutual funds and the like, make it difficult for anyone to render a verdict?”
It is not known whether Rajaratnam will testify in his own defense after the jury has heard hours of tapes and testimony from as many as six cooperating witnesses. Prosecutors say they could present up to 173 recordings of telephone conversations.
Among those who could be called by the government to testify is Lloyd Blankfein, chief of Goldman Sachs Group Inc., according to published reports.
Prosecutors and regulators have accused former Goldman board member Rajat Gupta of leaking information about the bank to his friend Rajaratnam, but Gupta has not been criminally charged.
Rajaratnam’s chief defense lawyer, John Dowd, has fought hard for his wealthy client, arguing that prosecutors have broadened the definition of insider trading. A money manager’s liberty should not be at risk because he trades on a stock while knowing something about the company, Dowd argues.
He also fought, unsuccessfully, to suppress the FBI’s secretly recorded phone conversations from trial.
The case is USA v Raj Rajaratnam et al, U.S. District Court for the Southern District of New York, No. 09-01184.
(Additional reporting by Basil Katz)
(Reporting by Grant McCool, editing by Dave Zimmerman)
