DealBook: Buffett’s Goldman Deal Is Topic in Gupta Insider Case

Louis Lanzano/Bloomberg NewsByron D. Trott, a former Goldman Sachs banker, was asked about Warren E. Buffett’s $5 billion investment in the bank.

Byron D. Trott has spent a career carefully cultivating the image of the discreet investment banker, a behind-the-scenes consigliere to some of America’s wealthiest businessmen, including his star client, Warren E. Buffett. At Goldman Sachs, Mr. Trott was so vigilant about guarding clients’ confidences that he was known to fire underlings who discussed private matters in the bank’s elevators.

But on Wednesday, Mr. Trott was forced to speak publicly about one of his biggest and most important deals — Mr. Buffett’s $5 billion investment in Goldman during the heart of the financial crisis in September 2008.

Mr. Trott took the witness stand for about an hour on Wednesday at the insider trading trial of Rajat K. Gupta, the former Goldman director charged with leaking boardroom secrets to his friend and business associate Raj Rajaratnam. Among the accusations is that Mr. Gupta gave Mr. Rajaratnam advance word of Mr. Buffett’s Goldman investment.

The government says that Mr. Rajaratnam traded on Mr. Gupta’s tips, reaping big profits for his Galleon Group hedge fund. Convicted by a jury of insider trading last year, Mr. Rajaratnam is serving an 11-year prison sentence. Mr. Gupta’s trial, in Federal District Court in Manhattan before Judge Jed S. Rakoff, began on Monday and is expected to last about three weeks.

Mr. Trott’s testimony focused on the days surrounding Mr. Buffett’s investment in Goldman, a tumultuous time in the markets. But first, a prosecutor asked Mr. Trott to tell the jury who Mr. Buffett was.

“He’s the most respected businessman and investor in America,” Mr. Trott said.

Mr. Gupta’s lawyer objected to such a superlative.

“I didn’t think that was in dispute,” said Judge Rakoff, breaking into a smile.

Judge Rakoff posed his own question to Mr. Trott for the jury’s sake, exercising more restraint in his description: “Is he a very large and well-known investor?”

“Yes,” Mr. Trott acknowledged.

Mr. Trott, 53, has established a niche advising many of the country’s richest families, including the Wrigleys and the Pritzkers. As a Goldman banker, he began advising Mr. Buffett in 2002 and has advised his company, Berkshire Hathaway, on numerous deals.

“Byron is the rare investment banker who puts himself in his client’s shoes,” wrote Mr. Buffett in his 2008 investor letter. Five years before that, Mr. Buffett wrote that Mr. Trott “understands Berkshire far better than any investment banker with whom we have talked and — it hurts me to say this — earns his fee.”

The silver-haired Mr. Trott, at ease on the witness stand and at times flashing a broad smile, gave the jury an account of how Mr. Buffett’s investment materialized. He described the dark days of September 2008, when Lehman Brothers, which Mr. Trott described as a “second-tier investment bank,” had filed for bankruptcy and there were questions about whether other banks like Goldman could survive.

His purpose in testifying, according to people briefed on the prosecutors’ strategy, was to explain how quickly the Buffett deal came together and how few people knew about it — other than Mr. Gupta — before it was announced.

“This was about as top secret as you can get,” said Mr. Trott, who left Goldman in 2009 to start his own investment firm, BDT Capital Partners.

Mr. Trott, who lives in Chicago, testified that he was at a client meeting near O’Hare Airport on Sept. 22, 2008, when he received a call on his cellphone from Goldman’s co-president, Jon Winkelried. Mr. Winkelried told him that Goldman was planning to raise $10 billion in a common stock offering to help the bank address its problems and calm the markets.

Upon hearing the news, Mr. Trott said that he pitched Mr. Winkelried on having Mr. Buffett act as a “cornerstone investor” on the transaction. He said he would fly to New York immediately so he could discuss the idea with the rest of Goldman’s top officers.

The next morning, on the 30th floor of Goldman’s former headquarters at 85 Broad Street in Lower Manhattan, Mr. Trott outlined a deal that he thought Mr. Buffett would agree to and would also make sense for the bank.

“It was hugely credentializing,” he said. “It was like getting the Good Housekeeping Seal of Approval.”

Later that morning, Mr. Trott said, he had a conversation with Mr. Buffett. Earlier in the year he had floated the idea of investing in Goldman to Mr. Buffett, who rejected the proposal. This time around, Mr. Trott said, the terms would have to be sweeter.

“I have a different proposal for you,” Mr. Trott said, according to his testimony.

Mr. Trott offered Mr. Buffett a “preferred with warrants,” a complex security that gave Mr. Buffett 10 percent annual interest on a $5 billion investment plus the option to buy additional Goldman stock at a set price.

“I know Warren very well,” testified Mr. Trott. “We had done numerous deals together and I knew the structure that he would want.”

After Mr. Buffett accepted the terms, Mr. Trott testified, he took the deal back to the bank’s senior executives. Around lunchtime, the executives agreed to take the deal to the board for a vote. But before they could do that, they needed to inform Mr. Buffett that the deal had been officially agreed upon. But Mr. Buffett was unavailable until after 2:30 p.m. A prosecutor asked Mr. Trott why.

“He promised his grandkids that he would take them to Dairy Queen” — the ice cream and fast-food chain owned by Mr. Buffett — “and he did not want to be interrupted,” said Mr. Trott, eliciting laughter from the jury.

Mr. Trott said that after firming things up with Mr. Buffett, Goldman held a board meeting by telephone at 3:15 p.m. The board approved the investment. Minutes later, the government says, Mr. Gupta called Mr. Rajaratnam and told him to buy Goldman stock. Prosecutors have said Mr. Rajaratnam reaped nearly $1 million by trading before the announcement.

Outside the jury on Wednesday, the prosecution and defense focused on another Goldman employee — David Loeb, a salesman who worked closely with Galleon.

The prosecutor, Reed Brodsky, said that Mr. Loeb had passed illicit tips about Intel, Apple and Hewlett-Packard to Mr. Rajaratnam. A lawyer for Mr. Gupta said that Mr. Loeb can be heard on a secretly recorded telephone call giving confidential information about those companies.

The defense, which complained to Judge Rakoff that prosecutors had not disclosed evidence about Mr. Loeb, is using the government’s investigation of three other Goldman executives to suggest to the jury that there were other sources of inside information within the bank.

Prosecutors have countered that these executives, including Mr. Loeb, had no access to confidential information about Goldman. A Goldman executive declined to comment.

This post has been revised to reflect the following correction:

Correction: May 24, 2012

Article source: http://dealbook.nytimes.com/2012/05/23/buffetts-goldman-deal-is-topic-in-an-insider-case/?partner=rss&emc=rss