Goldman’s Blankfein takes the stand

A director who allegedly tipped off an accused insider trading kingpin knew full well that the tips breached his duty to investors, Lloyd Blankfein said.

Blankfein, the Goldman Sachs (GS) CEO, testified for the prosecution Wednesday morning in the government’s case against trader Raj Rajaratnam. The U.S. attorney is trying to put the founder of the Galleon hedge fund behind bars for 20 years, saying he made off with $45 million via illegal insider trades on stocks including Goldman and Procter & Gamble (PG).

Fortune’s Katie Benner is at the trial in Lower Manhattan. Here is her dispatch:

Reads from press release

Blankfein said Rajat Gupta, the former Goldman board member accused of passing along $17 million worth of trading tips to Rajaratnam, knew he owed Goldman shareholders a fiduciary duty to keep a lid on developments in Goldman board meetings – but breathlessly called Rajaratnam on repeated occasions to fill him in anyway.

The testimony is important because the judge in the case, U.S. District Court Judge Richard Holwell, has ruled that prosecutors must show Rajaratnam’s alleged tippers not only fed him confidential information, but knew that doing so was illegal.

The Securities and Exchange Commission claimed in a civil complaint filed against Gupta this month that Gupta repeatedly called Rajaratnam just after getting off the phone from several Goldman board meetings during the financial crisis. Gupta has denied wrongdoing and then some.

The most celebrated instance relates to a Sept. 23, 2008, board meeting at which the Goldman board approved a $5 billion infusion from Warren Buffett’s Berkshire Hathaway (BRKA).

Blankfein testified he and Gupta were on that call. The SEC says that three minutes after that call ended, Gupta called Rajaratnam – whose funds promptly bought 175,000 Goldman shares.

Gupta and Rajatnam knew the development would be good for Goldman shares — as would a decision to raise money by selling stock to the public, Blankfein said.

The testimony by Blankfein, the highly compensated chief of one of the world’s most controversial banks, has been eagerly awaited since his probable appearance at the biggest insider trading trial in a generation was announced earlier this month.

Blankfein may have won over some skeptical jurors with his straightforward, easy-to-follow explanation of what Goldman does and what the firm expects of its directors. He may even have prompted a smile or two with his sheepish reading of the press release announcing the Berkshire deal, which among other things obliged him to repeat the line, “said Lloyd C. Blankfein, chairman and CEO of the Goldman Sachs Group Inc.”

But Blankfein didn’t let his guard down, continuing to insist in the face of all available evidence that Goldman was never at risk of failure.

“No matter how safe we were, it makes us that much safer,” he said of the twin capital raises.

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Follow me on Twitter @ColinCBarr.

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