UPDATE 3-US plans to play Goldman tapes at Rajaratnam trial

Fri Mar 4, 2011 4:51pm EST

* US: Tapes to show conspiracy between Rajaratnam, Gupta

* US: Rajaratnam got tips on Goldman earnings, Buffett (New throughout, adds comments, details on hearing)

By Grant McCool and Jonathan Stempel

NEW YORK, March 4 (Reuters) - Goldman Sachs Group Inc (GS.N) is being drawn into the criminal trial of one-time hedge fund billionaire Raj Rajaratnam, as prosecutors plan to show an insider-trading conspiracy involving a former director at the Wall Street bank.

Prosecutors intend to introduce audiotapes showing that Rajaratnam got inside tips from his friend Rajat Gupta, who sat on Goldman's board until last May. The trial of Rajaratnam, who was head of the Galleon Group hedge fund, starts next Tuesday in the highest profile Wall Street insider-trading case in a generation.

At a court hearing on Friday, prosecutors said the leaks include details about a $5 billion investment by Warren Buffett's Berkshire Hathaway Inc (BRKa.N) (BRKb.N) in Goldman at the height of the financial crisis in September 2008.

Goldman has not been accused of wrongdoing. The bank's chief executive, Lloyd Blankfein, has agreed to testify for the government, the Wall Street Journal reported on Friday.

Prosecutors first indicated they were looking at possible improper trades in Goldman shares by Rajaratnam nearly a year ago. Rajaratnam is also accused of illicit trades in stocks including Google and eBay.

On Tuesday, the U.S. Securities and Exchange Commission announced civil insider-trading claims against Gupta, saying Rajaratnam reaped about $17.5 million on Goldman trades based on the board member's tips. Gupta is a former worldwide managing director at the consulting firm McKinsey & Co.

"I take it the government is going to present evidence that Mr. Gupta is a co-conspirator?" U.S. District Judge Richard Holwell asked Assistant U.S. Attorney Jonathan Streeter in Manhattan federal court.

"Yes," Streeter replied. "That evidence we think establishes Gupta was a co-conspirator."

Gupta has not been criminally charged. His lawyer, Gary Naftalis, said his client has done nothing wrong. "These allegations first made by the SEC are totally baseless," he said.

The 14-count indictment against Rajaratnam includes charges of securities fraud and conspiracy. He once managed as much as $7 billion.

Prosectors' use of wiretaps has been a hallmark of the U.S. hedge fund insider-trading probe, which has resulted in more than two dozen arrests and at least 19 guilty pleas.

Rajaratnam is the central figure in the probe. Prosecutors have said they may present 173 intercepted phone conversations as evidence in the trial.

HURRIED CALLS AFTER BOARD MEETINGS, U.S. SAYS

In court, Streeter said prosecutors have evidence that Gupta at least twice called Rajaratnam within minutes after Goldman board meetings ended, leading to Rajaratnam trading in its stock.

He pointed to an instance in October 2008 when Gupta allegedly contacted Rajaratnam to tell him Goldman was on pace to lose money in its fiscal fourth quarter.

Streeter said Rajaratnam sold his entire stake in Goldman early the next day. Goldman did ultimately post a loss for that quarter, its first since going public.

While the indictment does not refer to all the possible evidence concerning Goldman, prosecutors may be entitled to introduce it, according to Charles Weisselberg, a law professor at the University of California at Berkeley.

"The government has some latitude to bring up acts not specifically listed in the indictment, but which may further the conspiracy, so long as it does not depart so far from the conspiracy as to prejudice the defendant," he said.

Among the earliest government witnesses is expected to be Anil Kumar, a former McKinsey consultant who pleaded guilty in January 2010 to leaking tips about a possible merger to Rajaratnam, in return for $1.75 million.

Rajaratnam and his lawyers declined to comment after the hearing.

"He's a good man," one of his lawyers, John Dowd, said as he patted the smiling Rajaratnam on his upper chest while they rode down a courtroom elevator.

The case is U.S. v. Rajaratnam, U.S. District Court, Southern District of New York, No. 09-01184. (Reporting by Grant McCool and Jonathan Stempel; Additional reporting by Dena Aubin and Basil Katz; editing by Gerald E. McCormick, Dave Zimmerman, Gary Hill)

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