Goldman Sachs Facing New Insider Trading Probe, In California

(Reuters) -- Federal prosecutors in California are investigating a Goldman Sachs employee for insider trading, according to prosecutors and defense lawyers who attended a hearing in U.S. federal court in New York on Thursday.

The employee is suspected of giving inside information on two public companies to former Galleon Group co-founder Raj Rajaratnam, who was convicted last year in one of the largest insider trading cases in Wall Street history.

The investigation of the Goldman employee was divulged during a hearing involving the insider trading case against former Goldman board member Rajat Gupta.

Gary Naftalis, the lawyer for Gupta, commenting on the newly disclosed investigation, said that Assistant US Attorney Reed Brodsky asked him not divulge details of the matter.

"Per Mr. Brodsky's request, I am not going to name his name," Naftalis said.

In a hearing a month ago, Naftalis revealed that another Goldman Sachs employee had been caught on a wiretap leaking secrets about Intel Corp and Apple Inc .

"That's obviously an area we have been pursuing in terms of our preparation for our defense at trial in terms of his connection to all this," Naftalis said at Thursday's hearing.

A spokesman for the U.S. Attorney's Office for the Central District of California declined to comment.

The attorneys at the Thursday court hearing said the employee in the California investigation still works at Goldman.

A spokesman for Goldman Sachs declined to comment.

GOLDMAN CONNECTION UNCLEAR

Despite Naftalis' statement, there is no apparent connection between the investigation in California and the Gupta case brought by federal prosecutors in New York. In fact, Naftalis admitted that Brodsky, the New York prosecutor, had only learned of the investigation himself on Wednesday evening.

However, it is not the first time Goldman's name has arisen in the Gupta matter.

A person familiar with the Gupta case said in early March that prosecutors are investigating David Loeb, a managing director of Goldman Sachs. Loeb works with technology hedge-fund employees, including an Asia-based analyst, Henry King, who is also under investigation, according to another source briefed on the case.

The sources declined to be identified because the matter is not public. Neither Loeb nor King has been accused of any wrongdoing and neither responded to emails asking for comment.

The insider-trading case has drawn in Goldman Sachs Chief Executive Officer Lloyd Blankfein, who was interviewed under oath on February 24 as a witness, according to court documents.

Blankfein testified for the government at Rajaratnam's trial. He is also expected to be called as a witness by the government at Gupta's trial.

MORE EVIDENCE IN GUPTA TRIAL

Gupta, a former director of Goldman Sachs Group Inc and Procter & Gamble Co , was charged with illegally tipping his former friend Rajaratnam.

Gupta was indicted in October. He is the highest-ranking executive charged in a broad U.S. crackdown on insider trading at hedge funds and faces five counts of securities fraud and one count of conspiracy.

The focus of Thursday's hearing was on the nature of the allegations against Gupta. Brodsky wanted to amend the charges to include another insider tip Gupta is alleged to have given to Rajaratnam on Proctor and Gamble's organic growth forecast for the fourth quarter of 2008.

He also wanted to broaden the description of the information about Goldman Sachs that Gupta is accused of passing to Rajaratnam in late 2008.

During the height of the financial crisis, just after Goldman converted itself into a bank holding company, prosecutors allege Gupta told Rajaratnam about Goldman's plans to raise more capital. Brodsky wanted to expand the description of the information to include not just Goldman's capital raising plans, but the status of its business in general.

Judge Jed Rakoff ruled the new Proctor and Gamble tip could be included, but the wording about the Goldman tip could not be changed.

Brodsky warned the judge that his team might need to add another round of new information to the charges after interviewing another witness on Monday.

Gupta's trial is scheduled to begin on May 21.

(Additional reporting by Lauran Tara LaCapra and Grant McCool; editing by Matthew Goldstein and Andre Grenon)