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September 19, 2011

You make the (sentencing) call: does insider trading merit decades in prison?

This latest insider-trading installment of "You make the (sentencing) call" is prompted by this lengthy new piece from the New York Times, which is headlined "In Galleon Case, Prison Term Is Seen as Test." Here are excerpts:

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.”...

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.”

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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Comments

I think it is totally appropriate. The lives that have been devastated, and the generational losses are huge. However, the problem is more that insider trading can receive 24 years in prison, and a child molester's average sentence is considerably less. We value profit of money today, rather than the profit of our future, our children, for tomorrow.

Posted by: Kareemah El-Amin | Sep 20, 2011 9:40:53 AM

He should receive the full 25 year sentence.

Business fraud victimizes the individual marks of the fraud, but also victimizes the honest businessman, who loses profits and marketshare to the cheaters and who may be forced out of business.

Additionally if frauds are not vigorously prosecuted and punished, the honest businessman may well conclude that it is irrational to not cheat as well. Eventually there will be no honest businesmen in a particular business, only cheaters.

From Gulliver's Travels:

“The Lilliputians look upon fraud as a greater crime than theft. For, they allege, care and vigilance, with a very common understanding, can protect a man’s goods from thieves, but honestly hath no fence against superior cunning. . . where fraud is permitted or connived at, or hath no law to punish it, the honest dealer is always undone, and the knave gets the advantage.”

Posted by: Fred | Sep 20, 2011 10:00:42 PM

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