Judge Jed Rakoff Says U.S. vs. Gupta Reveals Business Ethics Rotten to the Core

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.

Judge Jed Rakoff Says U.S. vs. Gupta Reveals Business Ethics Rotten to the Core