Rajat Gupta, a former board member at Goldman Sachs, has surrendered to the FBI, the latest arrest in a growing insider trading case.

In charging Mr. Gupta, the government will attempt to tie up one of the biggest loose ends resulting from the investigation into the Galleon Group, which began nearly five years ago at the Securities and Exchange Commission. Raj Rajaratnam, the Galleon co-founder, was sentenced to 11 years in prison this month for making tens of millions of dollars by trading on confidential tips.

Authorities have broadly pursued insider trading on Wall Street, exacting guilty pleas from a chemist at the Federal Drug Administration, among others, as recently as this month. In the past two years, authorities have charged 55 people with insider trading; of those, 51 have pleaded guilty or have been convicted of swapping illegal tips about company earnings and other major corporate events. While the majority of those charged have been traders and analysts on Wall Street, Mr. Gupta, 62, is the first executive to be implicated from the upper echelons of corporate America.

If you went by the prosecutions from the SEC, the US Attorney in the Southern District of New York and the Justice Department, you would think that the financial crisis was caused by an excess of insider trading. This insider trading scandal has netted a couple big fish, like Rajaratnam, and now may get a conviction of Gupta. But it’s a selective prosecution when there are so many other instances of fraud on Wall Street. As Yves Smith writes, we should be seeing a lot more prosecutions of Wall Street figures for a lot of other crimes:

Regardless of whether the legal argument is a bit aggressive or not, notice that the SEC is moving boldly on these cases when it has sorely neglected other beats. Let’s face it: insider trading cases are comparatively easy to prove, and the SEC likes to go after low hanging fruit.

Many people, including your humble blogger, have criticized the SEC for doing close to nothing as far as attacking abuses in mortgage securitizations and CDOs. We’ve also argued that they dropped a promising avenue for getting criminal (stress criminal) prosecutions of Wall Street executives by an apparent misreading of a ruling in their case against Angelo Mozilo.

Smith goes on to point the finger at Congress, which has defanged the SEC repeatedly since the Clinton years. But it’s undeniable that prosecutors are willing to push the envelope on these cases when it comes to insider trading – the charges against Gupta appear somewhat hard to prove, because he didn’t materially benefit – and not when it comes to securitization or other types of fraudulent activity.

It’s a stroke of timing that this Gupta case comes out right when Glenn Greenwald’s latest book on the two-tiered justice system in America comes out. Maybe federal prosecutors wanted to disprove his thesis. I don’t think they actually do so.

David Dayen

David Dayen

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