Peter Foley/Bloomberg NewsProsecutors want Raj Rajaratnam, who was convicted of securities fraud and conspiracy, to be sentenced to as much as 24 years.
Federal prosecutors want to send the convicted hedge fund chief Raj Rajaratnam to prison for as long as 24 years, which would be the longest insider trading sentence in history.
How a judge rules next week on Mr. Rajaratnam’s punishment is being seen in legal circles as a litmus test of whether the crime of insider trading justifies such a long prison term.
In May, a jury convicted Mr. Rajaratnam, the head of the hedge fund the Galleon Group, of 14 counts of securities fraud and conspiracy. Prosecutors, calling him “the modern face of illegal insider trading,” placed him at the center of a vast insider trading ring, accusing him of using a global network of tipsters to gain about $64 million from illegal stock trading.
The question is whether such a sentence — longer than the average federal prison term for murder — is appropriate.
“Given the magnitude of the crimes, it’s hard to feel any pity for him,” said Harlan J. Protass, a defense lawyer who teaches a sentencing class at the Benjamin N. Cardozo School of Law. “Still, there is a real question whether such a lengthy sentence is warranted for an insider trading offender.”
The Galleon Trial
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Sentences for white-collar criminals used to be relatively lenient, legal experts say. Corporate offenders were seen as nonviolent criminals, and judges would often impose probation terms or send them away for short stints to low-security prison camps nicknamed “Club Fed.”
This began to change in the late 1980s. The insider trading scandals and savings and loan crisis of that era resulted in increased sentences for corporate defendants. Michael Milken, who pleaded guilty to securities law violations, was sentenced to 10 years in prison. Charles Keating, the head of Lincoln Savings and Loan, was sentenced to 12 1/2 years. Both served far less time than their original sentences.
Around that time, in 1987, a government commission also issued federal sentencing guidelines that linked prison terms to the amount of loss in fraud cases. In 2001, an overhaul of those guidelines further increased sentences based on the dollar amounts involved in the crime, and specifically tied insider trading sentences to the amount of money illegally gained.
“Since the inception of the sentencing guidelines, we have seen a consistent and dramatic upward ratchet,” said James E. Felman, a lawyer in Tampa and co-chairman of the American Bar Association’s sentencing committee.
Today, prison terms measured in decades are common for white-collar criminals. In 2005, Bernard J. Ebbers, the former chief executive of WorldCom, was sentenced to 25 years in prison for a huge accounting fraud. Earlier this year, Lee B. Farkas, a former mortgage company executive, received a 30-year term for his role in a fraud that the government says caused $2.9 billion in losses. On Monday, a federal judge in Miami sentenced Marianella Valera, a former mental health company executive, to 35 years in prison for her role in a $205 million fraud at American Therapeutic; a 50-year sentence was earlier imposed on her co-defendant, Lawrence Duran.
For Mr. Rajaratnam, the government has requested a sentence from 19 years and seven months to 24 years and five months, based on federal sentencing guidelines. The government said he did not deserve leniency because he was a “fundamentally deceptive and dishonest person” who had lied under oath in a deposition and had tried to cover up his crimes.
If Judge Richard J. Holwell of the Federal District Court in Manhattan issues such a sentence on Sept. 27, it will be the longest prison term ever for an insider trading crime. A recent study by Bloomberg News of 43 defendants sentenced in federal court in Manhattan for insider trading in the last eight years found that the longest sentence was 10 years, to a Credit Suisse banker convicted in 2008 of leading a $7.8 million scheme.
Mr. Rajaratnam’s lawyers call the proposed sentence “grotesquely severe” and argue that “the advisory guidelines severely overstate the seriousness of the instant offenses, and would expose Mr. Rajaratnam to a sentence grossly out of proportion to the sentences imposed on other insider trading defendants.”
They point out that the sentence is not only disproportionate to the sentences imposed in other insider trading cases, but also greater than the average federal sentence for murder (23 years), kidnapping (14 years) or sexual abuse (nine years), according to the United States Sentencing Commission.
His lawyers also criticize prosecutors for comparing Mr. Rajaratnam’s crimes to the accounting fraud committed by Mr. Ebbers of WorldCom and the Ponzi scheme run by Bernard L. Madoff. Those crimes “ruined the lives and livelihoods of scores of victims,” while Mr. Rajaratnam’s insider trading offenses victimized no one, his lawyers said.
Insider trading does not cause “the kinds of measurable losses to identifiable victims that conventional fraud causes,” Mr. Rajaratnam’s lawyers wrote in a court filing.
The government has countered that insider trading is not a victimless crime.
“Rajaratnam betrayed Galleon’s investors, its employees, the counterparties to its trades, and the capital markets system upon which he built his wealth and success,” federal prosecutors said.
The government also urged Judge Holwell to impose a long sentence on Mr. Rajaratnam “to send a strong and clear message that the time for illegal insider trading to end is now.”
But defense lawyers also dispute prosecutors’ argument that a long sentence is necessary for deterrence purposes. If anything, they say, it is the government’s newly aggressive law enforcement tactics, like wiretapping the phones of stock traders, that will deter insider trading.
In the coming months, a number of Mr. Rajaratnam’s accomplices also face sentencing. And on Wednesday, Judge Jed S. Rakoff of Federal District Court in Manhattan will sentence Winifred Jiau, a technology industry consultant who, in a trial this summer unrelated to Mr. Rajaratnam’s, was convicted of passing illegal stock tips.
Judges are not bound by the sentencing guidelines. In 2006, Judge Rakoff sentenced Richard Adelson, a former health care company executive facing an 85-year sentence under the guidelines, to three and a half years in prison for participating in an accounting fraud that he wrote was “originally concocted by others.”
Judge Rakoff wrote that the proposed sentence exposed the “utter travesty of justice that sometimes results from the guidelines’ fetish with abstract arithmetic.”
Unlike Judge Rakoff, who is considered a maverick jurist, Judge Holwell is known for more conventional rulings. In at least two recent cases, Judge Holwell has departed slightly from the suggested sentencing guidelines and imposed shorter sentences than the ones recommended by the government.
In July, Judge Holwell sentenced Danielle Chiesi, a co-conspirator of Mr. Rajaratnam, to two and a half years in prison, which was less than the minimum three-year sentence requested by the government. Yet Ms. Chiesi pleaded guilty, whereas Mr. Rajaratnam fought the government’s charges and took his case to trial, a possible negative factor at sentencing.
Stuart P. Slotnick, a lawyer at Buchanan Ingersoll Rooney in New York, predicts that Judge Holwell will impose a prison term of 12 to 15 years, which, while less than the government’s request, would still be a record insider trading sentence. That sentence, Mr. Slotnick said, in part reflects attitudes since the financial crisis.
“There is a ‘Wall Street is bad’ mentality that permeates the culture,” he said. “It’s now in the social ether that financial crimes of whatever kind cause widespread damage and hurt everybody.”
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