During the "financial cataclysm" in September 2008, Goldman Sachs chairman and CEO Lloyd Blankfein was faced with a tough decision he did not want to make about one member of his trusted board of directors: Rajat Gupta.
Gupta, renowned as the former global managing director of McKinsey & Co., the world’s most trusted consulting company, had become one of the 10 independent directors on the board of Goldman Sachs in November 2006 while a McKinsey senior adviser and member of several other corporate boards. In a press release at the time, Blankfein had praised Gupta as a “valued source of counsel to institutions, governments and business leaders around the world.” He added: “Our shareholders will be fortunate to have his strategic and operational expertise and judgment represented on our board.”
Now Gupta is on trial for conspiracy and securities fraud in connection with an insider-trading scheme allegedly powered by secret information he got as a director of Goldman Sachs and Procter & Gamble.
Blankfein took the witness stand Monday against Gupta, who stands accused of leaking confidential information to hedge-fund billionaire Raj Rajaratnam, the founder and CEO of the Galleon Group of hedge funds. Blankfein also has testified against Rajaratnam, who was found guilty of insider trading last year and sentenced to 11 years in prison. Among the illegal tips the Galleon Group allegedly got were several from Gupta about not-yet-public, but “materially significant,” news from boardroom discussions at Goldman Sachs and Procter & Gamble.
Asked whether matters discussed by the Goldman board were confidential, Blankfein said Monday, “All parts of it were confidential.”
Earlier in the three-week-long trial, witnesses for the prosecution, including Anil Kumar, a former McKinsey consultant and friend of Gupta’s who has pleaded guilty to insider-trading charges, established that Gupta had quietly become a part owner and chairman of a Galleon Group International fund.
In September 2008, when Blankfein decided that Gupta had to resign from the Goldman Sachs board, the investment bank chief had no clue that Gupta had leaked information. What was bothering Blankfein was Gupta’s desire at the time to make more money working for Kohlberg Kravis & Roberts, a private-equity firm, while remaining on the Goldman board.
“Mr. Gupta told me he was considering or deciding to accept an offer from a large private-equity group,” Blankfein recalled, “to be on their advisory board.” The Goldman chief continued: “I told him that presented certain conflicts for us ... it created a problem and I did not think it was a good idea.”
Gupta told Blankfein, the Goldman chief said, that he could manage any potential conflicts that might arise while he also consulted with KKR, the private-equity firm first made famous in 1988 by its $25 billion hostile takeover of RJR Nabisco.
Blankfein made it clear that any leak from Rajat Gupta would have been a betrayal of his fiduciary duty to shareholders.
Blankfein said he decided that Gupta had to give up his Goldman Sachs board seat because KKR, while a big customer of Goldman's, also competed with the investment bank, and the conflicts for a director would be too significant to overcome while honoring his “fiduciary duty.”
Blankfein said he decided Gupta had to be eased off the board gently, without creating a public stir. Soon, a Goldman press release announcing Gupta's departure was drafted. Blankfein testified: "We prepared for his exit from the board and we prepared to announce it," But "events intervened," said Blankfein, and that announcement never happened, as far bigger issues were roiling the financial world in early September 2008.
The investment bank Lehman Brothers, a weaker but once formidable competitor of Goldman's, had just filed for bankruptcy and its collapse was causing chaos among Wall Street's investment banks. It was exactly the wrong moment—from the firm's public-relations point of view—for Gupta, regarded as the most important man at the world's most trusted corporate-consulting firm, to leave the Goldman Sachs board.
So Blankfein asked Gupta to withdraw his resignation and stay on the board. "I was worried," Blankfein said, that Gupta's departure from the board would be misunderstood by investors and analysts, in the face of the "cataclysmic event."
The Goldman boss added that his immediate concerns about "conflicts of interests" arising from Gupta's desire to pursue private-equity deals "didn't seem to loom as large because there was not going to be a lot of business done with private equity" in the immediate aftermath of the new recession.
The sensitivity Blankfein showed about public perception was even more evident as he testified about the importance of a Sept. 23, 2008, board meeting conducted by telephone shortly before the New York Stock Exchange closed at 4 p.m. Eastern time. At that meeting, Blankfein told the board that Berkshire Hathaway, the company run by Warren Buffett, the most trusted businessman in America, would be investing $5 billion overnight in Goldman Sachs.
That nugget, prosecutors say, was relayed within minutes by Gupta to Rajaratnam, who immediately ordered Galleon traders to “buy Goldman.’ In less than five minutes before the markets closed, Galleon traders bought $43 million in Goldman stock, which was sold the following day for a $1 million profit after the announcement of the Buffett deal was made public in a press release.
Blankfein’s presence on the witness stand was symbolic: here was the leader of the inner sanctum of the world's most important investment bank putting the finishing touches on the most important defendant to date in the entire investigation of criminal behavior in insider trading.
By testifying in absolute terms that members of the Goldman Sachs board are not authorized to disclose any information from any board meeting, Blankfein made it clear that any leak from Goldman Sachs board director Gupta would have been a betrayal of his fiduciary duty to shareholders.
Judge Jed Rakoff is not hearing the case Tuesday and appears to be planning on giving Blankfein Wednesday off to attend the prep-school graduation and celebratory lunch for his daughter before she goes off to Harvard.
When Blankfein finishes his testimony Thursday, defense attorney Gary Naftalis will have a real challenge trying to cross-examine the Goldman Sachs chief, who is a Harvard Law graduate and former Wall Street lawyer turned commodities salesman. Naftalis will do his best—as did Rajaratnam’s lawyer John Dowd—to try to show that information from the Goldman board is not all confidential and that stock tips come from many directions.
After all, Naftalis’s goal is to convince at least one of the eight women and four men on the jury that there is a “reasonable doubt” in the case against Gupta, since there is no audiotaped phone call between Gupta and Rajaratnam discussing Goldman Sachs. But there are plenty of phone records and other testimony to make a strong circumstantial case, and it is doubtful the cross-examination of Blankfein will shake that much.