Gupta Judge Ignored Sentence Proposals in Insider Cases
By David Glovin and Patricia Hurtado – Jun 18, 2012 12:12 AM ET
The judge who will sentence former Goldman Sachs Group Inc. (GS) Director Rajat Gupta for insider trading has a track record of cutting the government’s recommended punishment in some cases by half or more.
U.S. District Judge Jed Rakoff in Manhattan is to sentence Gupta, once a managing partner of McKinsey & Co., for tipping Galleon Group LLC co-founder Raj Rajaratnam. In September, the judge sentenced 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.
Jiau allowed four hedge fund managers to reap millions of dollars in profits and earned more than $200,000 in fees herself, according to the government, which told Rakoff she showed no remorse and lied to judges and magistrates. Two of her colleagues got probation from Rakoff instead of jail. Gupta, 63, faces a maximum 20-year term for securities fraud at his Oct. 18 sentencing, the most serious count he was convicted of last week.
“I suspect he’ll come in a little lower than in the Jiau case,” said Peter Henning, a professor at Wayne State University Law School in Detroit who predicted prosecutors will seek a sentence for Gupta of between eight and 10 years, slightly less than the 11 years Rajaratnam received.
Henning said Rakoff will sentence Gupta to three years in prison — one reason being that Gupta has a much greater history of charity than Jiau, a point “that seems to be persuasive to judges,” he said.
The Jiau sentence came as a surprise after Rakoff initially appeared to agree with the government’s recommendation last fall.
“There are certain things the court can’t ignore,” the judge said. “This was a serious crime, going to the integrity of the financial markets, engaged in for a period of up to two years. That alone requires some meaningful sentence.”
Yet minutes later, Rakoff criticized the advisory federal sentencing guidelines, deriding them as “the mirage of something that can be obtained with arithmetic certainty.”
Rakoff’s ultimate sentence for Jiau was below the term of 78 to 97 months suggested by federal guidelines. Others convicted in the government’s insider trading probe, such as former Primary Global Research LLC executive James Fleishman, received a 30-month term instead of as many as 108 months sought by the U.S. Former SAC Capital Advisors LP manager Donald Longueuil also received a 30-month term instead of the 46-57 months sought by the prosecution; and Rakoff sentenced Manosha Karunatilaka, a former Taiwan Semiconductor Manufacturing Co. manager, to 18 months in prison while the U.S. sought a term of 37 to 46 months.
Leniency For Clients
In a 2006 opinion, which has been cited by defense attorneys seeking leniency for clients, Rakoff called the prosecutor’s request for an 85-year sentence in an accounting fraud case “patently unreasonable” and “absurd.”
After the government proposed 15 years instead, Rakoff ordered Richard Abelson, the former president of Impath Inc., to serve 42 months in prison, a sentence Rakoff called “fair, just and reasonable.”
“How he weights it all is impossible to tell,” said Richard Holwell, the former federal judge who sentenced Rajaratnam to 11 years in prison, the longest insider trading term at the time. “A lot of it will depend on how important he thinks it is to give a strong warning to portfolio managers on Wall Street.”
Still, unless Gupta wins on appeal by challenging the legality of wiretaps used against him, or the exclusion of evidence that may have helped his case, he seems headed to prison, said Anthony Sabino, a professor of law at the Tobin School of Business at St. John’s University in New York.
Gupta’s sentencing for insider trading will follow those of Rajaratnam, 55, who is appealing his conviction, and attorney Matthew Kluger, who was sentenced to 12 years in prison on June 5. Both were before different judges.
In a case not involving insider trading, Rakoff, 68, in 2009 sentenced Marc Drier, founder of a prominent law firm, to 20 years in prison. Dreier had defrauded hedge funds of more than $400 million and stole money from clients. Prosecutors had requested a term of 145 years.
Gupta and Rajaratnam are the highest profile executives convicted since federal authorities in New York began their nationwide crackdown on insider trading in 2007. Sixty eight people have been charged since the initiative began. To date, 62 people have been found guilty.
Sabino said Gupta’s lack of criminal history should work in his favor. That and charitable works aside, Rakoff, who has challenged the authority of the U.S. Securities and Exchange Commission, tends to impose lesser sentences upon insider traders than the government recommends, Sabino said.
“Gupta is a fallen angel,” he said. Even “Jed Rakoff, as tough as he is, isn’t going to impose a sentence in the double- digits on him. This guy has got a squeaky clean record, not as much as a jaywalking ticket since college and business school. He has a magnificent record and years of living a good, honest life. That will play in his favor.”
Gupta was found guilty of leaking tips to Rajaratnam about New York-based Goldman Sachs, including information about a $5 billion investment by Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), and a tip on a quarterly loss. He was also convicted of conspiracy, which carries a maximum sentence of five years.
Federal law requires judges to impose a sentence that reflects the seriousness of the offense, promotes “respect for the law” and provides “just punishment for the offense, while deterring others from “criminal conduct,” according to an opinion Rakoff wrote in 2006.
He will have to consult the non-binding federal guidelines, which calculate a prison term based on factors including the amount of money involved in the scheme and whether Gupta “abused a position of trust.”
Prosecutors may claim that Galleon earned or saved more than $16 million from Gupta’s tips, Henning said.
Rakoff will also consider Gupta’s background, the extent of his good works, letters from friends and family that will be written on his behalf, and the nature of the crime itself. Last year, in a SEC lawsuit against Rajaratnam, Rakoff assailed the “huge and brazen nature” of his insider-trading scheme.
Gupta didn’t profit directly from that scheme. Prosecutors said Rajaratnam made about $800,000 from trading on a Goldman Sachs-related tip he’d received from Gupta.
Gupta’s good works span years working in health, education and relief work. He served as chairman of the Global Fund, an initiative to fight AIDS, tuberculosis and malaria. He co- founded the Indian School of Business in Hyderabad, which has become a leading business school in India, and raised funds for victims of an earthquake that struck the Indian state of Gujarat in 2001.
Despite Gupta’s charitable works, Sabino said Rakoff will probably impose some kind of term of incarceration to send a message that insider trading won’t be tolerated.
“Gupta was at the pinnacle of American business, and to do something so egregious merits some kind of term,” Sabino said. “Sure Raj was the corrupter, but Gupta allowed himself to be corrupted and he has to be punished. If the judge lets him off too easy, it looks to everyone that a big shot can get away with breaking the law. He can’t give him a slap on the wrist. I would guess a minimum term of five years.”
Gary Naftalis, a lawyer for Gupta, and Ellen Davis, a spokeswoman for U.S. Attorney Preet Bharara, declined to comment.
Guidelines in the Rajaratnam case called for a prison term ranging from about 19 years to as many as 24 1/2 years. Holwell said he imposed a lesser term because Rajaratnam was sick with failing kidneys and had shown “very significant dedication to helping others” throughout his life.
Holwell said he expects Gupta’s lawyers to argue he’s a “stalwart of the community” with a long history of charitable giving who didn’t directly profit from the tips to Rajaratnam.
“Rakoff will have to take it all into account,” he said.
The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court Southern District of New York (Manhattan).
To contact the reporters on this story: David Glovin in New York federal court at email@example.com; Patricia Hurtado in New York federal court at firstname.lastname@example.org.
To contact the editor responsible for this story: Michael Hytha at email@example.com