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.
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)
NEW YORK — The lawyer for a wealthy investment manager accused in the biggest insider-trading scandal ever to hit the hedge-fund world engaged in a combative verbal battle Tuesday with a top government witness, trying to cast his client’s one-time friend as a man facing a long prison term who is desperate to win his freedom.
Former financial consultant Anil Kumar grew increasingly impatient and defensive with attorney John Dowd as he explained his encounters with Galleon Group founder Raj Rajaratnam, a one-time billionaire whose family of hedge funds was forced to shut down after his October 2009 arrest.
Under earlier questioning from a prosecutor over three days, Kumar said Rajaratnam paid hundreds of thousands of dollars into overseas accounts in return for inside information.
The two men met at the University of Pennsylvania’s Wharton School in the early 1980s. Kumar is testifying under a plea agreement that can win him leniency if he answers questions honestly. He has admitted feeding inside information to Rajaratnam.
The testy exchanges between Kumar and Dowd came on the same day that the government played an audiotape of a phone call in which a former Goldman Sachs board member could be heard telling Rajaratnam that Goldman was discussing whether it was wise to acquire a bank such as Wachovia Bank or an insurance company like American International Group.
The government had said it would introduce evidence at trial that Rajaratnam was aided by his relationship with the ex-board member, who is not criminally charged.
But it was the exchanges between Dowd and Kumar that highlighted the day, with both men engaging in lengthy verbal sparring.
“You provided services to Mr. Rajaratnam?” Dowd asked Kumar, who worked for McKinsey Co. for more than 23 years before his 2009 arrest.
“Illegal services,” Kumar responded.
“Nevertheless services, correct?” Dowd asked.
“Yes,” Kumar said. He paused before again adding: “illegal services.”
Repeatedly, Dowd tried to restrict what Kumar said by warning that he had asked a yes-or-no question and it should be answered accordingly.
It was the first sample jurors got to Dowd’s manner of questioning after he delivered an opening statement last week that took twice as long as the initial description of the evidence in the case presented by Assistant U.S. Attorney Jonathan Streeter.
Dowd, best known for preparing a report that led Pete Rose to accept a lifetime ban from baseball in 1989, opened his cross examination of Kumar by talking about securities-fraud charges Kumar pleaded guilty to a year ago that could bring a prison term of up to 25 years.
“You might not go to jail at all, correct?” Dowd asked, dismissively.
“Yes,” Kumar responded.
“It’s important to make Mr. Streeter happy, correct?” Dowd asked.
“Wrong,” Kumar immediately answered.
“And his goal is to convict Mr. Rajaratnam, correct?” the defense lawyer continued.
“Wrong,” came the reply again.
Kumar is considered key to the government case against the 53-year-old Rajaratnam, who was charged along with more than two dozen other hedge-fund employees and workers for public companies.
The government has said Rajaratnam’s illegal profits may have topped $50 million while Dowd has maintained that Rajaratnam only made trades based on information that was already public. After his arrest, Kumar quickly cooperated, which gave Dowd another line of attack that he did not pass up.
“When you got caught, you pinned it all on Raj didn’t you, ’cause that’s what you needed to do to stay out of jail?” Dowd asked.
And that Level Global, which used to manage $4 billion, is closing.Â
But when you add it all up with the additional news from Pensions and Investments today that FrontPoint was hit with an additional $500 million in redemptions in the first quarter, the insider trading scandal has cost hedge funds a stunning ~$9 billion.
From PI:
Multistrategy hedge fund manager FrontPoint Partners, touched by a separate insider-trading investigation, received redemption requests for an additional $500 million for the first quarter, confirmed a source who asked not to be identified.
And that’s just three of the many hedge funds that have been tied to the investigation.Â
You know who else was constantly paranoid about wiretaps? The Wire’s Russell “Stringer” Bell. For good reason.
The Fed’s insider trading investigation is giving the already cagey hedge fund industry more reason to be paranoid lately.
Hedge fund managers are paying security firms to check their offices and homes for bugs and listening devices, according to the FT. The suspicious bunch want to know whether or not the government is listening in on their conversations.
The paranoia was set in by the Fed’s insider trading investigation that’s charged dozens of hedge fund employees and expert network employees for their involvement in receiving and sharing non-public information about companies like Apple, Dell, AMD and Marvell.
The hedge fund industry is very opaque and one of the least regulated areas of the financial industry. So it comes as little surprise that fund managers are paying money to find out if anyone is listening in on their super-secret trading activity.
But doesn’t the mere act of hiring experts to sweep your home and office for wiretaps implicate a bit of guilt? That’s not to say every firm that’s paid for a sweep of their office is the next RajRajaratnam but if you’ve got nothing to hide, why all the fuss?
Before the privacy police get on my case, I want to clarify that I agree with the principle behind average citizens wanting to know whether or not the government is watching and listening. However, I don’t think the hedge fund industry should be placed on the same level.
Besides, as a computer forensics expert tells the FT, it’s highly unlikely that most hedge funds are being tapped anyway.  Edward Stroz of Stroz Friedberg tells his clients to think twice before requesting the sweeps. He asks them: “What led you to think this? Is it really worth the effort, or are you thinking back to some movie you saw?”
I wonder how many hedge fund managers are catching up re-runs of HBO’s The Wire. How many of them are sitting around living a scene similar to this one? Perhaps minus the part about ripping payphones out of the walls. But maybe not.
The insider trading scandal ended up costing three hedge funds, Diamondback, FrontPoint, and Level Global, a combined $9 billion.
