Background: the former Mckinsey exec and Goldman board member was charged civilly with insider trading on March 1, 2011. The SEC later dismissed the case and word was that they would instead sue him in NY Federal Court.
The criminal charges are a much bigger deal.
At issue in the civil charges was whether details discussed during a Goldman Sachs board meeting was confidential or material and nonpublic information.
Gupta was accused of insider trading information gleaned in Goldman Sachs’ board room (the indictment is forthcoming), and now everyone wants to know how the biggest insider trial in history (Gupta is the highest-ranking exec to testify) will proceed. What will his defence be? What will the prosecution argue?
The trial of Raj Rajaratnam provided some insight into the big discussion points that will come up during the criminal trial of Rajat Gupta.
Of course we have no way of knowing what Gupta’s defence will be, but when he took the stand to testify, Lloyd Blankfein had an interesting exchange with Raj’s defence lawyer, John Dowd, that might shed some light on one point.
Rajaratnam did not cooperate with the prosecutors who are bringing charges against Rajat Gupta (he was offered a plea deal. Raj told Newsweek that prosecutors were particularly interested in Raj’s strategic position close to Gupta. They asked him to wear a wire and tape conversations with Gupta, but Raj said no, acc6rding to Raj.), but part of his defence suggested that Goldman Sachs might be able to communicate with “tier 1” clients, like Raj, about big upcoming deals that important clients have exposure to.
When CEO Lloyd Blankfein took the stand to testify, he explained the difference between what Gupta did wrong, and what COO Gary Cohn did right, as far as giving information to tier 1 clients.
What Cohn did right was to keep one of Goldman’s top clients abreast of matters that affect the firm’s business on a regular basis. This might well be part of Cohn’s job, to inform clients.
Here’s what happened during Blankfein’s testimony on March 23, 2011. (We were there and wrote an article about it back then.)
What the Raj defence tried to establish is that the discussion along the lines of what happened during a board meeting is legitimate for a “Tier 1” client, and that it was a standard inquiry in advance of Raj’s upcoming meeting with Gary Cohn.
“We rank clients,” explained Blankfein, based on who’s “more important or less important.”
“I’m not entirely sure what ‘Tier 1’ means myself,” said Blankfein, “but I know that we rank clients.”
defence attorney John Dowd asked Blankfein if he spoke to such important clients and kept them informed.
Of course they do, and in fact Blankfein visited the offices of Galleon “a long time ago,” when he was a Senior Vice President at the firm.
How the testimony helps the defence’s case is this: The prosecution is trying to prove that the information that Gupta passed on to Raj was material nonpublic information. The defence suggests that it’s only “confidential,” information because it was discussed in the meeting, and not material nonpublic because 1) at least one news article reported on the rumour of Goldman’s buying Wachovia and 2) people were talking about it happening, possibly including Cohn, who might have discussed the report with Galleon during or even before visiting the Galleon offices.
And thus a seed of suspicion was planted in the minds of the jury. But a moment later, we found out there was nothing there.
“And you’re not suggesting Gary Cohn did anything wrong, are you?” Asked Dowd.
“No,” said Blankfein.
What Gupta did wrong was divulge information discussed during a board meeting.
The government has a recording of a call that took place between Raj and then-Goldman board member Rajat Gupta. Raj tells Gupta he heard that Goldman might acquire AIG and Gupta tells Raj what the Goldman board said in its meeting about the deal (both Wachovia and AIG were on the table, but a deal is unlikely).
Lloyd Blankfein testified that divulging information discussed during the board meeting is not speculation. “Speculation is people trying to guess,” Lloyd Blankfein testified. In a board meeting, however, those board members “know what the company is going to do.”
Blankfein did not testify on what is or is not material nonpublic information. (That is normal.)
Raj defence lawyer John Dowd had tried to argue that inside information was not revealed on this call. Rather, the call was about Raj getting ready for a meeting with a top executive at Goldman, Gary Cohn. (Raj had a meeting scheduled with Cohn for later that week.)
Gupta was just doing his job, helping one of Goldman’s tier one clients, a tier one client who owned Goldman stock and was concerned about the future of the business. Raj was just doing his job preparing for his meeting so that he could ask Cohn smart questions.
“The government gets all excited about this call,” says the defence, but they misunderstood it. Raj and Gupta just did their jobs.
Blankfein’s testimony, that what is discussed in board meetings is not speculation because those board members know what the company is going to do, debunks that argument entirely.
Blankfein also explained that what board members discuss during the meeting is confidential.
And he also expressly said that Gupta violated company policy by telling Raj about the Goldman-AIG-Wachovia deal in preparation for his upcoming meeting with Cohn.
The prosecution played the wiretap of the conversation and asked Blankfein, “did Gupta violate company policy?”
Blankfein said, “Um, yes.”
Gupta is expected to appear in court later today.