Lloyd Blankfein testifies at the insider trading trial of Rajat Gupta (r.) as Judge Jed Rakoff looks on. (Shirley Shepard/AFP/GettyImages)
For anyone who’d like to see the bank executives who led America into the teeth of the financial crisis strung up by the laces of their Prada wingtips, a trip to the Southern District courthouse in Lower Manhattan may be a deflating experience.
The Observer had come to the federal courthouse seeking succor. Late last month, Reuters laid hands on an internal memo from the Securities and Exchange Commission declaring its investigation into Lehman Brothers was unlikely to lead to criminal charges. In the time it took Dick Fuld to type “the Bros always wins!!” the SEC was feeding reporters the company line: Lehman prosecutions were still a possibility.
That claim became harder to credit this weekend, alas, when SEC enforcement director Robert Khuzami told C-Span cameras that the worst crisis-era bets on souring mortgage bonds were made below the level of the executive suite. (Hmm. Did someone forget to eat his Wheaties?)
U.S. v. Gupta was supposed to be another story. Southern District U.S. Attorney Preet Bharara has been on an insider-trading tear, after all, winning convictions or guilty pleas in 59 of the 66 cases his office has brought since 2009. In the most high-profile case, the government gained an 11-year sentence for Raj Rajaratnam, the billionaire hedge fund manager caught paying corporate insiders to convey privileged information.
Rajat Gupta was among those who supplied Mr. Rajaratnam inside dope, the government said, alleging the former Mc-
Kinsey & Co. chief executive used his standing as a board director at such corporations as Goldman Sachs and Procter & Gamble to pass secrets to Mr. Rajaratnam’s Galleon Group. In one damning-if-true instance, the government says Mr. Gupta telephoned Mr. Rajaratnam minutes after learning that Warren Buffett’s Berkshire Hathaway was primed to invest $5 billion in Goldman Sachs. Galleon bought Goldman stock—and turned a quick million-dollar profit.
But securities law, it turns out, is not the best fuel for populist outrage. We knew that white-collar prosecutions were notoriously hard to win, that wealthy defendants could spend vast sums on defense lawyers, that the complexities of financial cases could wilt the attention of the perkiest juries. It wasn’t until we’d planted ourselves on the hard wooden pews at 500 Pearl Street that we felt the full gravity of the conventional wisdom.
The resource gap between defense and prosecution was clear on the first day of the trial, when four attorneys from Kramer Levin Naftalis & Frankel huddled in the courtroom with an outside jury consultant, even as junior lawyers back at the firm’s Midtown offices poured over a real-time feed of the trial transcript. The prosecution objected. Surely it wasn’t fair for the defense to employ muscle outside the courthouse to research potential jurors’ names? They might as well outsource the voir dire to a team of freelance Facebook trawlers in Bangalore! But Judge Jed Rakoff—the same cranky legalist who’s made a reputation for hard treatment of financial institutions—allowed the outside help.
It got worse. Though the charges against Mr. Gupta are particularly egregious—a board director at Fortune 500 companies stepping out of a confidential meeting to funnel stock tips to a hedge fund manager is about as morally offensive as insider trading can get—the evidence is largely circumstantial. In its case against Mr. Rajaratnam, the government had smoking-hot wiretaps and corroborating witnesses to prove their case. It still took jurors a week to return a guilty verdict.
The evidence in Gupta was flimsier: witness testimony and phone records indicate that Mr. Gupta and Mr. Rajaratnam spoke around 3:55 p.m. on the day Mr. Buffett announced his Goldman stake, for instance, and in a wiretapped call the next day Mr. Rajaratnam told a Galleon trader that he’d received a tip that “something good might happen to Goldman.” In a wiretapped call a month later, Mr. Rajaratnam told another trader that “I heard yesterday from someone who’s on the board of Goldman Sachs that they’re going to lose $2 a share, the market has them making $2.50.”
It wasn’t hard to connect the dots, but that doesn’t mean a jury will try.
The defendant, meanwhile, had the best lawyers money could buy poking holes in the government’s case. Since Gary P. Naftalis left a post as a Southern District prosecutor more than three decades ago, he’s been tapped by everyone from Kidder Peabody and Salomon Brothers to Michael Eisner and the former-CEOs of Arthur Andersen and WorldCom. The Times has dubbed Mr. Naftalis “Columbo with a law degree” for the lawyer’s disheveled looks and folksy sense of humor. In Judge Rakoff’s courtroom, Mr. Naftalis appeared as if he’d just stepped out of a rainstorm (it wasn’t raining). The Observer wasn’t fooled, of course, but we were a little bit charmed and certainly discouraged.
Mr. Naftalis is the type of lawyer you get when you have millions in the bank and a strong desire to stay out of prison. He’s the kind of lawyer that the prosecutors on the case, Reed Brodsky and Richard Tarlowe, may dream of one day becoming.
Mr. Naftalis’s goal was to blow some smoke, and he proved adept at it.
“If you’re the defense, the normal procedure is to get the jury confused and bored,” John Coffee, a Columbia law professor, told us. “If they’re bored, they miss the smoking gun when it’s produced. If the defense can get the legal issues convoluted, the jury is unlikely to send a man away over issues they can’t understand.”
He added: “I’ve testified as an expert witness in securities cases and looked over and actually seen jurors sleeping.”
“It’s part of the reason that there are so few criminal prosecutions,” said Steve Thel, a professor at Fordham Law. “Prosecutors are reluctant to take on complicated cases.”
Those selected to sit in judgment of the Gupta case included a registered nurse, an elementary school teacher and a freelance beauty consultant. “I am in awe of our jury because they have managed to remain attentive,” Judge Rakoff said last week, urging lawyers on both sides to make things more interesting.
Assistant U.S. Attorney Brodsky started dumbing down the financial lingo with his very first witness, asking Mr. Rajaratnam’s former executive assistant to define a hedge fund. “It’s a place where stocks are traded,” the witness answered. And we thought it was the loose bills our Auntie Vera keeps stashed in a coffee can to pay for gardening supplies! The next day, Assistant US Attorney Tarlowe asked a witness what an index was. “It’s a stock made up of other stocks,” came the reply.
At least the defense left those definitions uncontested. On day three of the trial, the defense unleashed a barrage of objections to Mr. Tarlowe’s examination of the trader who executed Mr. Rajaratnam’s infamous Goldman trade.
“What does it mean to raise $2.5 billion in a common stock offering?” Mr. Tarlowe asked.
“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
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