The biggest kahuna on Wall Street, Goldman Sachs CEO Lloyd Blankfein, took the stand in New York City on Wednesday to testify in federal prosecutors’ insider trading case against Raj Rajaratnam, the founder of Galleon hedge funds who the feds allege made more than $50 million through illegal trades.
Raj had sources up and down the Street, allegedly even at the highest levels imaginable in the ultra-exclusive world of investing: the boardroom of Goldman Sachs, the world’s mightiest investment bank. The spectacle of the mighty Blankfein testifying about the hedge fund kingpin Rajaratnam underscores the simple truth about Wall Street: individual investors should understand the stock market for what it is—a rigged game in which they don’t stand a chance.
Blankfein’s testimony centered on the alleged connection between Raj and Rajat Gupta, a former member of the Goldman Board of Directors. If those allegations are true, they reveal a damning reality not just for the parties involved but for everyone on the Street.
The Securities and Exchange Commission alleges that Gupta passed inside information about Goldman to Raj. The hot tips included advance word of the bank’s earnings as well as the incredibly important information that Warren Buffett, the world’s most famous investor, was just about to invest $5 billion in the firm to shore it up during the darkest days of the financial meltdown in 2008.
Minutes after allegedly receiving that tip, practically straight from the boardroom, Raj loaded up on Goldman stock.
Blankfein is no stranger to the hot seat as a result of Goldman’s business practices. Last year, the SEC alleged that Goldman materially misstated and omitted facts in disclosure documents for a synthetic CDO it created called Abacus 2007-AC1. A few months later, it neither admitted nor denied wrongdoing when it paid the SEC $500 million to settle the matter.
Tapes of discussions between Raj and Gupta were played at the hearing, and when Mr. Blankfein was asked whether Gupta had violated his agreement with Goldman Sachs as a board member by revealing confidences, Mr. Blankfein said: “My sense of it, yes.”
If this is the way Wall Street works, investors may be better off taking their money to a casino. There they could at least see a show and get some free drinks and sandwiches.