As U.S. v. Gupta Grinds on, Architects of Financial Meltdown Go Unpunished

The wheels of justice turn slowly at 500 Pearl St.

“Objection,” offered the defense. Sustained.

“What is your understanding of what it means to raise $2.5 billion in a common stock offering?” Mr. Tarlowe reworded.

“Objection,” said the defense. Sustained.

“Do you know how a stock offering works?” Mr. Tarlowe attempted.

“Yes,” said the witness.

“How do you know?” asked Mr. Tarlowe.

“Objection.”

“Was that objection on foundation or relevance?” Judge Rakoff chimed in. “Foundation and relevance,” Mr. Naftalis quipped, turning to the press gallery, “and whatever else we can think of.”

There were other moments of drama. After one cross-examination, Mr. Naftalis exclaimed “Got him!” loud enough for the jury to hear. On another occasion, the defense counsel made a thumbs-up as he walked away from the witness stand. Mr. Brodsky complained about the grandstanding. Mr. Naftalis complained about Mr. Brodsky’s treatment of a witness. “I think we’re down to a very polite form of name-calling and that’s not what I want to hear from either counsel,” Judge Rakoff scolded, but the defense had gotten the better of the exchange.

Prosecutors don’t generally try cases they can’t win, and the government may have a key element on its side. “Juries pick up signals from the judge,” said Mr. Coffee. “If the judge is leaning one way or another, the jury tends to lean in the same direction.” Judge Rakoff has developed a reputation in recent years as a thorn in the side of financial firms, most recently blocking an SEC settlement with Citigroup and chiding the watchdog for letting the bank off the hook without either a fine or an admission of wrongdoing. “The most disturbing thing about this case is what it says about business ethics,” Mr. Rakoff told the courtroom in the Gupta case. “It’s not a case of one bad apple, but a bushelful.”

Nor would we trivialize the government’s efforts. If Mr. Gupta used his position as a corporate director to feed Galleon Group profitable secrets, Mr. Gupta should go to jail. But we confess to having held out hope, in whatever naïveté, that the government still had bigger fish to fry. After all, Lehman’s bankruptcy examiner Anton R. Valukas reported that Lehman Brothers moved up to $50 billion in bad assets off the firm’s balance sheet in so-called Repo 105 transactions, concealing the bank’s failing state from shareholders and regulators alike. The SEC is pursuing cases against senior officers at Fannie Mae and Freddie Mac, but the claims seem to stop short of criminalizing the mortgage giants’ role in the foreclosure crisis. Indeed, whatever the government’s chances in Gupta—Mr. Coffee handicapped the trial at 60-40 in favor of a conviction—our visit to Judge Rakoff’s courtroom didn’t do much to engender hope of bigger cases.

There’s another challenge to securing convictions in white-collar cases: tangible victims are often lacking. Indeed, it was Mr. Gupta—a silver glint in his combed-back hair, mouth frozen in a dignified grimace—who gave off the air of the wronged party. Behind him sat two benches full of supporters, often including his daughters, who looked just as polished as you would expect from a foursome who holds seven Ivy League degrees. What’s that you say? What about the shareholders in the firms Mr. Gupta allegedly betrayed, or the taxpayers who propped up failing financial institutions?

We suppose those victims were everywhere in the Southern District courthouse, whether they realized it or not.

pclark@observer.com