Goldman Sachs' former Indian-American director violated the firm's code of conduct by allegedly disclosing details from a 2008 board meeting to hedge fund tycoon Raj Rajaratnam, the company CEO Lloyd Blankfein has testified.
Gupta has denied wrongdoing, and has not been charged criminally. So far, he has only been named in an administrative civil proceeding by the US regulator Securities and Exchange Commission (SEC).
Testifying before a New York court on Wednesday in the biggest insider trading trial in the US in decades, Blankfein said Gupta violated the firm's confidentiality in discussing the possibility that it might acquire a a commercial bank like Wachovia or an insurance company like AIG.
A prosecuor played for Blankfein a recording of a July 29, 2008 phone conversation-secretly recorded by the FBI-in which Gupta tells Sri Lankan born Galleon hedge fund founder Rajaratnam that the Goldman board had discussed such a possibility.
"Did Rajat Gupta violate Goldman Sachs' confidentiality policy?" he asked, referring to the conversation.
"Uh, uh, yes," Blankfein replied. "We didn't want information about our company going outside until the appropriate time."
But lead defence attorney John Dowd noted on cross-examination that there had been considerable public speculation earlier in 2008 about investment banks merging with commercial banks or insurance companies.
Questioned later by the prosecution about media reports, Blankfein said there is a difference between speculation and confidential board discussions.
"Speculation is people trying to guess what a company is going to do. The board knows what the company is going to do," he said.
But he conceded under questioning by Dowd that the firm's code of conduct does not address whether confidential information is the same as "material inside information," the legal standard for insider trading.
Prosecutors say Gupta also tipped Rajaratnam to other key developments in 2008, including a five billion dollar investment in Goldman by Warren Buffett's Berkshire Hathaway Berkshire Hathaway Inc.
The defence claims Rajaratnam's investments were based on public information about events and Rajaratnam was buying shares of many banks in anticipation of the giant bank bailout known as TARP.
Meanwhile, Gupta, invoked his Fifth Amendment right not to incriminate himself when the SEC wanted to question him, a prosecutor said.
Shortly before the start of proceedings on Wednesday, Assistant US Attorney Reed Brodsky asked whether the defence intended to introduce into evidence a submission that Gupta made to the SEC.
Dowd said he didn't plan on telling jurors about the submission.
"Gupta took the Fifth Amendment when he spoke to the SEC," Brodsky told US District Judge Richard Holwell. Gupta "wasn't deposed when the SEC asked for his deposition," Brodsky said.