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June 16, 2012

Any early federal sentencing predictions after quick conviction in Gupta insider trading case?

As reported here by CNN, "Rajat Gupta, the consummate corporate insider and former director at Goldman Sachs, was found guilty of insider trading on Friday," and it took the  "federal jury in New York ... just over a day of deliberation [to find] Gupta guilty of four of six criminal counts."  In this New York Times piece, Professor Peter Henning provides a great preview of some sentencing basics now facing Gupta:

The jury convicted Mr. Gupta on tips he made to Mr. Rajaratnam in September and October 2008, about developments at Goldman.  Prosecutors had wiretaps of Mr. Rajaratnam describing his source on Goldman’s board, which pointed a finger directly at Mr. Gupta.  With sentencing scheduled for Oct. 16, the focus of the case will now shift to his punishment as well as the potential issues his defense lawyers may introduce on appeal.

In recommending prison terms for insider trading, the federal sentencing guidelines for insiders focus primarily on the financial gains made by a defendant.  Mr. Gupta did not personally trade in Goldman Sachs or Procter & Gamble shares based on the inside information he received.  But by tipping off Mr. Rajaratnam, he is responsible for the transactions conducted through Galleon Group based on the information he provided.

By convicting Mr. Gupta of conspiracy, prosecutors will most likely argue that he is responsible for all trading cited in the indictment — which was estimated at trial to have generated for Galleon over $16 million in gains or in losses avoided. Prosecutors will also seek to add on to the sentence by arguing that Mr. Gupta “abused a position of trust” by leaking information while serving as a director of Goldman and P&G. Based on these two issues, the sentencing guidelines recommend a sentence of 8 to 10 years.

Mr. Gupta will argue for a much lower sentence, claiming that the acquittal on two counts should mean that any trading gains from transactions related to those charges should be excluded from the sentencing calculation. He is also likely to argue that Mr. Rajaratnam himself made the decision on how much to invest, and so the amount of the gain overstates the harm from the insider tips.

But even based solely on the 2008 Goldman trades in which he was convicted of tipping Mr. Rajaratnam, the sentencing guidelines range would still dictate 6 to 8 years in prison. Mr. Gupta is likely to claim that other factors should be taken into consideration — his strong reputation in the business world and extensive charitable efforts — to argue for a much lower sentence, perhaps even home confinement.

Judge Jed S. Rakoff of the Federal District Court in Manhattan will determine the sentence, and he has shown some hostility toward the sentencing guidelines in a previous securities fraud case. So he may be persuaded to impose a lower prison term than the government wants.

In United States v. Adelson, an accounting fraud case, the guidelines calculation called for a life sentence for a company’s former president who had helped cover up an accounting fraud.  But Judge Rakoff rejected such a severe punishment, describing “the utter travesty of justice that sometimes results from the guidelines’ fetish with abstract arithmetic, as well as the harm that guideline calculations can visit on human beings if not cabined by common sense.”

You can be sure that Mr. Gupta’s defense team will include the Adelson opinion prominently in its sentencing arguments. And prosecutors naturally will do their best to explain why insider trading is different.

In 2009, Judge Rakoff sentenced the lawyer Marc Dreier to 20 years in prison for leading a scheme that defrauded investors of nearly $700 million, rejecting the government’s recommendation of a 145-year prison sentence. At the sentencing, Judge Rakoff said that “Mr. Dreier is not going to get much sympathy from this court, but he is not Mr. Madoff from any analysis, and that’s why I can’t understand why the government is asking for 145 years.” As a result, prosecutors are likely to temper their sentencing recommendation, and will have to defend their interpretation if they want the court to impose a stiff sentence.

Based on Henning's guideline calculations and my expectation that Gupta's lawyers will put together a strong set of sentencing materials, I would place the over/under betting line for Gupta's sentencing at around 5 years' imprisonment. 

My instinct is that Rajaratnam's 11-year prison term providing a functional ceiling on Gupta's sentencing exposure, and that Judge Rakoff is going to be strongly inclined to impose some term of imprisonment.  Splitting the difference within those basic parameters, and given Judge Rakoff's historic inclination to resist rigid application of the fraud guidelines, Gupta can reasonably hope for a sentence of only a few years imprisonment.  But, especially in this political climate and in the wake of a jury conviction, I am sure prosecutors will be advocating forcefully for a prison term closer to a decade.

UPDATE:  This new Bloomberg piece provides lots of background on Judge Rakoff's recent sentencing history in white-collar cases.  It notes, inter alia, that last year Judge Rakoff "entenced Winifred Jiau, a Stanford University-educated consultant convicted of corrupting friends and selling confidential information, to four years in prison, less than half of the maximum 10 years sought by federal prosecutors."  That datum makes me inclined to move the over/under betting line for Gupta's sentencing down to 4 years' imprisonment.

June 16, 2012 at 11:44 AM | Permalink


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