Photo illo: Ed Johnson

When Rajat Gupta was sentenced to two years in prison last Wednesday, the government finally nailed to the wall the largest scalp it has taken to date in its multiyear investigation of rampant insider trading on Wall Street. He wasn’t the richest—that would be erstwhile hedge fund manager Raj Rajaratnam, the man to whom Mr. Gupta was convicted of passing confidential information he learned while serving on the boards of Goldman Sachs and Procter & Gamble. But he’s certainly the highest-profile person to be convicted of such charges since everybody’s favorite reprobate homemaker, Martha Stewart. Like Ms. Stewart, Mr. Gupta got off easy—two years instead of the eight to 10 that the government had asked for. But that’s the way the world works, people. Get used to it.

Mr. Gupta plans to appeal, of course. Which is one reason why his statement before U.S. District Judge Jed Rakoff was so predictably aggravating: he expressed remorse—albeit only for the effect the trial has had on those close to him—and declined to make any admission of guilt. It was the classic, “I’m sorry if what I said offended you,” non-apology apology. No matter. Like my longtime nemesis Conrad Black—the disgraced former newspaper mogul who served two years for fraud yet still feels compelled to absurdly proclaim his innocence every chance he gets—no one really gives a damn, or believes a word he says. They both broke the law and were convicted for their crimes. Period.

There is a legal wrinkle that might get Mr. Gupta off somewhere down the road, in what will surely be a lengthy appeals process: the fact that he didn’t seem to benefit financially from his insider dealings. But again, that’s one for the lawyers to argue about. In the court of public opinion, the man is a criminal. Case closed. In this non-lawyer’s humble opinion, his failure to profit doesn’t make him innocent—it just makes him stupid in addition to being unscrupulous. I wonder what it must feel like to be one of the only people to get punished for committing a financial crime in recent years. For a man who has spent his life as part of the global elite, now to be seen as nothing but a common criminal must be a profoundly humbling experience. That’s the thing about prominent people committing common crimes; strip away their expensive lawyers and their bluster, and it all just seems so ... pedestrian.

And what a steep fall it has been. Mr. Gupta’s was a singular career—he was one of the most prominent India-born chief executives of a major international concern—McKinsey & Co., which he ran between 1994 and 2003. (He left the building in 2007.) And in subsequent years, he was a giant in the world of philanthropy. But as this whole ordeal has shown, his is actually the same story we’ve heard a million times before. In fact, the broad strokes of Mr. Gupta’s case are eerily familiar in more ways than one.

The Conrad Black Effect

The loquacious Mr. Black was convicted of defrauding the shareholders of Hollinger International, a company over which he had almost absolute control. If all he needed was a few extra bucks, the man could have just given himself a raise. Instead, like an idiot, he chose to break the law. But stupidity is no defense for wrongdoing. Indeed, it is its constant companion. The same goes for Mr. Gupta: While he wisely refrained from emailing his partner in crime, thereby distinguishing himself from an even dumber cohort of modern-day Wall Street criminals, he did phone him literally seconds after telephonic board meetings of Goldman Sachs to spill the beans about confidential earnings reports and other news. What ever happened to the old meeting on a park bench? Don’t these boneheads watch Homeland? You should have just put an “X” in white chalk on the lamppost, Rajat. Maybe next time.

The Reverse Lance Armstrong Effect

In the lead-up to his sentencing, Mr. Gupta’s team somehow convinced his friends in both business and philanthropy to write letters to the court on behalf of the fallen corporate consigliere. He even managed to get Bill Gates to send over a statement of support, although Mr. Gates wisely avoided comment on the case itself and merely pointed out Mr. Gupta’s important work for the Bill & Melinda Gates Foundation. There’s no arguing about the good that Mr. Gupta has done, including being a founder and chairman of the board of The Global Fund to Fight AIDS, Tuberculosis, and Malaria. And we should thank him for that. But it doesn’t change the fact of his crimes.

Lance Armstrong’s defenders pursued a similarly desperate line of argument when the final nail went into that cheater’s inner tube. “Look at all the good he has done!” they said, as if having used his ill-gotten fame and fortune to fight cancer canceled out the bad acts that brought him to prominence. You might be able to convince me to buy that logic if Lance had given all his own money away. But he hasn’t—one recent report estimated his net worth in excess of $125 million. So no, Lance, it doesn’t change the fact that you’re a lifelong cheater and a bullier of your teammates.

If I knock over a bank and give half the money away, does it absolve me of guilt for keeping the other half? Of course not. And while Mr. Gupta surely is, as Judge Rakoff pointed out, an otherwise good guy who did a very bad thing—thus differentiating him from Mr. Armstrong, who seems to have been a very bad guy who went on to do good—the point is the same. You don’t get to stack all your benevolent deeds up on one side of the scales of justice to try to counter the weight of your crimes. It’s a different goddamn scale. Maybe Mr. Armstrong and Mr. Gupta are still getting into heaven for all their good works—you won’t find me blocking their way—but before Mr. Gupta steps through the pearly gates, he has at least got to pass through another set of gates, those protecting a medium security prison in Otisville, N.Y.

The Martha Stewart Effect

During the trial, one popular gripe was that that the government was going after Mr. Gupta because of his high profile. That’s the same gambit that Martha Stewart’s lawyers tried when she got caught with her hand in the insider trading homemade double-chunk macadamia cookie jar. God, that’s a tiresome one. Let’s be honest here—there are different rules for the rich and the poor in this country. But nothing sows the seeds of contempt more than the “You’re just targeting me because I’m so successful” defense. Having spent some time talking to U.S. Attorney Preet Bharara about the Rajaratnam and Gupta cases, I can tell you exactly why he targeted those prosecutions: Because he had the goods on them. The government prefers to bring cases it can win. Mr. Gupta was charged, in other words, not because he was famous, but because through his own illegal actions he handed Mr. Bharara and his team an airtight case.

The Goldman Sachs Effect (a k a The McKinsey Effect)

Defending himself against the criticism that his headlines overpromised, the former editor of Money magazine, Frank Lalli, famously retorted, “What’s a headline? It’s a shouted message down a crowded bar.” The point was that we all know that editors use headlines to grab our attention—that’s why they’re so big—and there was no crime in a little hype. (A long-time Money staple: Retire Rich!) Much of the media has eagerlymentioned Goldman in the headlines of all its Gupta stories because … well, you know. Because that’s the kind of thing that moves product. While I am not usually in the business of making apologies for Goldman, this is one instance in which the bank was unfairly tied to a case it actually had nothing to do with. In fact, in this case, Goldman was a victim. The best part? Mr. Gupta is objecting to Goldman’s bid for reimbursement of the legal fees (and the cost of an internal investigation) it was obliged to cover due to his crimes. What an asshole.

The same goes for McKinsey & Company. While there’s an argument to be made that Mr. Gupta damaged that institution severely when he was running the joint—you can read more about that in my history of the company, The Firm, due out in August—it’s totally wrongheaded to suggest that McKinsey’s reputation ought to suffer for actions he took years after leaving the company. He’d been gone since 2007, after all, and his offenses had nothing whatsoever to do with McKinsey. Alas, the same can’t be said for the misdeeds of Mr. Gupta’s old McKinsey colleague, Anil Kumar, who pleaded guilty in this same investigation. He sold McKinsey client secrets out the back door. You can be sure McKinsey has locked said door and thrown away the key. Point being, while it’s hard to marshal sympathy for either Goldman or McKinsey—quite possibly the two most arrogant and self-satisfied professional services entities on the planet—in this case, we need to give them both a pass.

The Deterrent Effect (a k a Money, Money, Money)

In addition to his jail time, Mr. Gupta was fined $5 million by the court. He’ll appeal that, too. But kudos to Judge Rakoff for bringing the punitive hammer down. Hopefully the fine will put the fear of God into other insider trading punters on Wall Street who have correctly concluded—up until this point, at least—that even if they’re caught, their punishments will be embarrassingly mild. Hit them where it counts—in the pocketbook containing the money they all worship so dearly—and the message might actually be heard. Rajat Gupta is certainly hearing it loud and clear.

editorial@observer.com

World Economic Forum/Michael Wuertenberg

Rajat Gupta, the former chief executive officer of McKinsey & Co., was sentenced to two years imprisonment for insider trading this afternoon during a hearing presided over by Judge Jed Rakoff at the U.S. Southern District courthouse.

Mr. Gupta, who was convicted in May of using his position on the board of directors at Goldman Sachs to pass privileged information to Galleon Group hedge fund manager Raj Rajaratnam, has sought probation in lieu of imprisonment. The government recommended a jail term of eight to 10 years.

“With today’s sentence, Rajat Gupta now must face the grave consequences of his crime," said U.S. Attorney Preet Bharara in an emailed statement. "His conduct has forever tarnished a once-sterling reputation that took years to cultivate. We hope that others who might consider breaking the securities laws will take heed from this sad occasion and choose not to follow in Mr. Gupta’s footsteps.”

In arguing for a lighter sentence, Mr. Gupta's attorney Gary P. Naftalis  reiterated his client's "extraordinary" philanthropic record, reading from letters written on behalf of the former corporate chieftain, and argued that Mr. Gupta's fall from grace was punishment enough for his crimes.

"He had one of the best reputations on the planet," said Mr. Naftalis at today's hearing, which The Observer attended from an upstairs spillover room at the downtown Manhattan courthouse. "His reputation was a lot more important than any amount of money could be."

Judge Rakoff acknowledged Mr. Gupta's humanitarian record, but said that insider trading was "easy to commit, hard to catch," and that the need for deterrent was strong.

The effect of Mr. Gupta's crime, said Judge Rakoff, was "to place in jeopardy the integrity of the marketplace, one of the greatest assets this country possesses."

Mr. Gupta is generally considered to be the most prominent figure to be convicted during the government's ongoing crackdown on insider trading, which has netted more than 70 convictions or guilty pleas over the last three years. Mr. Rajaratnam, the hedge fund manager at the hub of many of the Justice Department's recent insider trading cases, is currently serving an 11-year prison sentence.

Mr. Gupta was also fined $5 million.

European leaders promised a more integrated banking system at the G-20 meeting in Mexico City yesterday, listing common banking oversight and depositor guarantees among future steps to be considered.

Asset managers like Legg Mason are preparing for worst case news out of Europe.

Greek savers aren't the only ones stuffing banknotes under their mattresses; Reuters reports that institutional investors are increasingly holding cash.

("If you wrapped up all the $100 bills in circulation, it would form a cube about 74 feet per side...")

Spain paid 2 percentage points more to borrow on 12-month bonds yesterday than it did one month ago.

If all that paints too rosy a picture, talk to Mark J. Grant.

For a little optimist, CNBC brings you Mark Mobius.

Jon Stewart interviews the drachma.

Your tab... Goldman Sachs advanced Rajat Gupta nearly $30 million to cover legal expenses, according to The New York Times, salt in the wounds after a) the former McKinsey & Co. chief executive and Goldman director passed Goldman secrets to hedge fund manager Raj Rajaratnam, according to the jury and b) Mr. Gupta's defense team took an adversarial approach to the parade of Goldman execs appearing at the witness stand (one attorney for Mr. Gupta called Goldman CEO Lloyd Blankfein "cold and callous," according to The Times). Anyway, Goldman has been picking up the tab because firm bylaws require the bank to pay the legal fees of executives and board directors; Mr. Gupta signed a pretrial agreement stipulating that he would pay his own legal bills if convicted.

Hide the whale: Bruno Iksil, the JPMorgan trader known as the London Whale, sometimes resisted sharing the details of his trading positions with superiors,The Wall Street Journalreports: "Mr. Iksil once confided to the colleague that when he wanted to avoid questions from supervisors about his trades, he sometimes would start discussing a mathematical term, equation or other technical jargon, to confuse and end the conversation."

Jamie Dimon is scheduled to testify before the "harsher and crazier" House of Representatives today.

BofA to divest? Swiss private bank Julius Baer is in talks to acquire Bank of America's non-U.S. wealth management unit, which manages about $90 billion, and which Reuters says could be worth about $2 billion.

Short-term fix: Nine months and $15 million later, Michael Francis is out as president of J.C. Penney.

Bharara.

A former marketing executive at AT&T pled guilty to insider trading charges after providing sales data for the Apple iPhone and RIM's Blackberry to a so-called expert network, said U.S. Attorney Preet Bharara in a statement.

Alnoor Ebrahim, 57, of Alpharetta, Georgia, pled guilty to one count of conspiracy to commit securities fraud and wire fraud. According to a press release, Mr. Ebrahim was paid more than $180,000 between 2008 and 2010 for providing nonpublic information on handset sales to investors. The charge carries a maximum sentence of five years.

The guilty plea comes after Mr. Bharara's office obtained a guilty verdict in the insider trading trial of Rajat Gupta, the former McKinsey & Co. chief executive charged with passing corporate secrets to now-imprisoned hedge fund manager Raj Rajaratnam.

Mr. Ebrahim's guilty plea marks the government's 63rd insider trading conviction since October 2009.

Updated to correct the number of insider trading convictions obtained by the government in recent years.

The Greek elections do little to ease problems facing Spain or Italy.

French Socialists once a majority in parliamentary elections, giving President François Hollande a supportive legislature.

The Citigroup analysts who put the chances of a Grexit at 50 to 75 percent are sticking with those odds, despite the results of yesterday's elections.

Lion's share: Morgan Stanley sought to be the "sole driver" of the Facebook IPO, positioning itself to collect the bulk of fees—and criticism for the company's plummeting share price in the weeks after the offering. We've heard that line before, of course, but The Wall Street Journal puts Morgan Stanley banker Michael Grimes back through the paces.

Post-Facebook, investment bankers may need to replace "oversubscribed" as a line for marketing offerings.

HARP helping banks: A federal program that allows struggling homeowners to refinance mortgages at prevailing low interest rates may be helping banks more than borrowers, according to a Nomura research report. Borrowers who participate in HARP are compelled to refinance with existing lenders, and banks are taking advantage by charging above-market interest rates, The Wall Street Journal reports. The upshot: HARP may save homeowners $2.5 to $5 billion this year, while banks stand to gain $12 billion in additional revenues through the program.

Gupta's fate: Rajat Gupta was found guilty of three counts of fraud and one count of conspiracy at his insider trading trial Friday, and barring a successful appeal, the fate of the former McKinsey & Co. CEO now rests with Judge Jed Rakoff. That might not be the worst thing, as Judge Rakoff has shown some leniency in sentencing insider-trading convicts. Mr. Gupta's sentencing hearing is scheduled for Oct. 18.

The Times reports that jurors were conflicted, with some shedding tears during the reading of the verdict.

Paperboy:The New York Times looks at Warren Buffett's affinity for newspapers, and hears nary a discouraging word about the legendary investor's management of The Buffalo News, which Mr. Buffett acquired in 1977.

Pop quiz: If you're thinking about day trading, The Big Picture has a quick quiz for you.

Reporter passes: "Market-moving" reporter Dan Dorfman died at 80.

“We have the spent the last day reviewing what we believe we need to present in the defense case,” Mr. Naftalis wrote. “After substantial reflection and consideration, we have determined that Mr. Gupta will not be a witness on his own behalf in the defense case.”

That news marked a change in course, according to The New York Times, which reports that Mr. Naftalis told the court last week it was "highly likely" that the defense would call Mr. Gupta to the stand. On the other hand, it may simply mark Mr. Naftalis' decision to discard an oft-used red herring.

"If you want your adversary to waste time preparing for a cross-examination, you might make them think that you're going to call the defendant," Columbia law professor John Coffee told us about a week ago, during a call to discuss the challenges of prosecuting white collar crimes. "It he took the stand it would be make-or-break, and I don't see a veteran counsel like Mr. Naftalis going through with it."

With Mr. Gupta off the docket, closing arguments could begin as soon as tomorrow.

[World Economic Forum/Michael Wuertenberg]

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

Exhibit A: Michael Cardillo, a former-Galleon Group trader who is cooperating with the government's case against Rajat Gupta, the one-time McKinsey & Co. CEO charged with feeding tips to Raj Rajaratnam. Mr. Cardillo has testified that Galleon portfolio manager R.K. Rajaratnam bragged that brother Raj had an inside source at Procter & Gamble, where Mr. Gupta was once a board director. On cross examination, defense attorney Gary Naftalis implied that Galleon employees tended to exaggerate the quality of their inside info. According to The New York Times:

Mr. Cardillo said he once witnessed R.K. Rajaratnam, who had previously worked at Kraft, tell his brother that Irene Rosenfeld, Kraft’s chief executive, would give him advance word if the company was going to buy Cadbury.

The deal that ultimately happened, but Mr. Cardillo testified that he was skeptical that R.K. Rajaratnam would ever get such information from Ms. Rosenfeld before an announcement.

Also:

Mr. Naftalis asked Mr. Cardillo about a recommendation by Mike Fisherman, a former Galleon colleague, to bet that shares of the women’s retailer Chico’s would fall. When pressed by his colleagues for his reasons for shorting the stock, Mr. Fisherman said that he had a tip from Chico’s chief financial officer, according to Mr. Naftalis. Mr. Fisherman later told Mr. Cardillo that he fabricated his inside source at Chico’s, Mr. Naftalis suggested.

Did Galleon employees often lie about their inside sources? Mr. Naftalis asked. Only rarely.

[World Economic Forum/Photo by Michael Wuertenberg]

Judge Jed Rakoff. (The Washington Post)

After 16 years presiding over white collar cases in the U.S. District Court's Southern District, you'd think Judge Jed Rakoff would be hard to disallusion. Not so. It only took six days for the insider trading trial of Rajat Gupta—the former McKinsey & Co. CEO accused of tipping Galleon Group hedge fund manager Raj Rajaratnam to sensitive corporate secrets—to cause Mr. Rakoff to hang his head in dismay."The most disturbing thing about this case is what it says about business ethics," Mr. Rakoff said. "It's not a case of one bad apple, but a bushelful."The judge was in the process of deciding whether to admit records of a phone call between the offices of McKinsey and Galleon into evidence: The government said the call helped show that Mr. Gupta leaked word that Procter & Gamble planned to sell its Folgers coffee unit; The defense said Mr. Gupta was on another call at the time and besides, there were other potential tipsters, a bushelful, even.

Handwringing complete, Mr. Rakoff concluded there was a "preponderance of circumstantial evidence for submissibility," or something, though not without summarizing the defense's arguments. "You made my argument better than I did," said Gary Naftalis, lead attorney for Mr. Gupta. "Though to lesser effect than I would have hoped."

And so the trial plodded on, with Procter & Gamble chief financial officer Jon R. Moeller explaining how the company reported financial results to investors. At least Mr. Moeller had the requisite experience to testify on the matter. Last week, defense attorneys peppered witness examination with objections on the grounds of foundation—that the witness on the stand lacked the wherewithall to define a stock offering, say, or an index fund.

It's a common defense technique in white collar trials, Fordham Law prof Steve Thel told The Observer, who is occasionally called as an expert witness to define financial terms in securities cases. "If you want to tell the jury what a board of directors is, and what the duties are, it's a fine line," said Thel. "It can be a contestable issue, because it's the judge who's supposed to tell the jury what the law is."

Still, the government extracted Mr. Moeller's testimony unmolested, or at least for as long as The Observer lingered in the courtroom. A dodgy moment did arise—the blond-and-ruddy Mr. Moeller described Procter & Gamble's Folgers strategy as a choice between a traditional spin-off and a reverse Morris trust split merger—but thankfully, no one asked the executive to define that latter.

Squeeze play:

Self-defense: Rajat Gupta's "swept-back hair, square jaw and soothing voice" could make the former McKinsey & Co. CEO his own best witness as he stands trial for insider trading in lower Manhattan's Southern District courthouse. Calling a defendant to the stand is often risky business.

Detoxed: Citigroup dismantled a board committee that oversaw the bank's toxic assets, according to Bloomberg. Citi Holdings, the bad bank created by CEO Vikram Pandit to house risky loans, still holds about $200 billion in assets, including Greek and Spanish bonds. That's no small amount, even if it's down from $600 billion when Citi Holdings was created in 2008.

$850 an hour: Madoff trustee Irving H. Picard has generated more $554 million in fess against $330 million returned to the con man's victims, and Andrew Ross Sorkin wonders if there's a better way.

Weak glue: Dewey & LeBoeuf filed Chapter 11, and the like big law firm failures before it, the recipe was growth-by-merger and poaching of star attorneys from other firms: When times got tough, the firm's lawyers had no common culture to rally around.

Europe leveraged: At least a quarter of European leveraged buyout firms with debt due before 2015 may default, according to Moody's.

The tempered reaction to Moody's downgrade of Nordic banks indicated the ratings company's influence is waning.

Escape from Tokyo: Japanese investors are buying foreign property to serve as safe haven in the event of financial disaster.

[Timothy A. Clary/AFP/GettyImages]