Hedge-Fund Insider-Trading Sentence for Raj Rajaratnam May Be Longest Ever
By Bob Van Voris and Patricia Hurtado – Oct 10, 2011 9:51 AM ET
Galleon Group LLC’s Raj Rajaratnam faces a federal judge this week who will weigh wildly divergent portraits of the disgraced hedge fund manager while interpreting guidelines that may call for one of the longest insider trading sentences in U.S. history.
Prosecutors paint Rajaratnam as a “serial insider trader” who corrupted friends and business associates to illegally make profits or avoid losses totaling $72 million. Defense lawyers say Rajaratnam is a generous man who committed victimless crimes. A prison stretch would kill him, they claim.
U.S. District Judge Richard Holwell in Manhattan, who will sentence Rajaratnam Oct. 13, presided over the jury trial in which the fund manager was convicted of running the biggest insider trading ring in a generation. The judge will consult nonbinding sentencing guidelines that sometimes recommend longer terms for white-collar criminals than some violent offenders.
“The sentence called for by the guidelines is likely to be excessive,” said Barry Boss, a partner in the Washington office of Cozen O’Connor and co-chairman of the American Bar Association’s Criminal Justice Section Sentencing Committee.
All 14 Counts
Rajaratnam, 54, was convicted in May of 14 counts of securities fraud and conspiracy. Prosecutors asked Holwell to give him a prison sentence of 19 1/2 to 24 1/2 years, which they said is within the guidelines. The defense, claiming Rajaratnam’s actions made him only $7.4 million, argued for a guideline calculation that would call for a sentence of 6 1/2 to 8 years, according to a person familiar with the defense case who spoke on condition of anonymity. Defense lawyer John Dowd declined to comment on the range.
There is no parole under the federal prison system.
Prosecutors claim Rajaratnam was at the center of a seven- year conspiracy to trade on inside information from corporate executives, bankers, consultants, traders and directors of public companies. He used the information to trade ahead of public announcements about earnings, forecasts, mergers and spinoffs involving more than a dozen companies, according to the evidence presented at his trial.
In sentencing Rajaratnam, Holwell must consult the U.S. Sentencing Commission’s Guidelines Manual, more than 500 pages of tables and instructions for calculating advisory guideline sentences. Fraud sentences are largely determined by the amount lost in the fraud, lawyers said, and people convicted of multimillion-dollar frauds may face the kind of guideline sentences more typically given to murderers or kidnappers.
Bernard Madoff, convicted in the largest-ever U.S. Ponzi scheme, is serving a 150-year term in a federal prison in Butner, North Carolina. Madoff’s fraud had cost his investors at least $13.3 billion, prosecutors said at the time of his sentencing. That amount has grown since then.
Former WorldCom Inc. Chief Executive Officer Bernard Ebbers was sentenced to 25 years after he was convicted of an $11 billion fraud. Samuel Israel, co-founder of hedge fund Bayou Group LLC, was sentenced to 20 years for a $400 million fraud. Former Enron Corp. CEO Jeffrey Skilling was given a 24-year sentence for charges that included fraud and insider trading.
“In financial crime cases, the loss calculation has become the driving factor in sentencing calculations,” said Jeff Ifrah, a Washington lawyer and co-author of “Federal Sentencing for Business Crimes.”
Rajaratnam is trying to avoid sentencing enhancements that may apply if the judge finds he obstructed an investigation by the U.S. Securities and Exchange Commission and that he was a leader or organizer of a scheme involving five or more people.
“Rajaratnam is a uniquely situated individual compared with all the others,” Assistant U.S. Attorney Reed Brodsky said at an Oct. 4 hearing. “He is an individual at the top of a pyramid, the head of a hedge fund who’s orchestrating and controlling interlocking insider-trading schemes.”
Terence Lynam, one of Rajaratnam’s lawyers, told Holwell during that hearing, “A lot of people just wanted to ingratiate themselves to Mr. Rajaratnam.”
Rajaratnam has argued that the government’s calculation is wrong and that the resulting guideline sentence is “grotesquely severe.” He asked Holwell for a sentence “substantially below” the range suggested by prosecutors.
Rajaratnam has also appealed to Holwell for leniency on health grounds, with his lawyers urging the judge not to let him die in prison.
“Mr. Rajaratnam is not a healthy man,” they wrote in a court filing, citing “significant and challenging medical issues.”
Rajaratnam’s lawyers, who haven’t made public the nature of his health problems, said “His death will be hastened by a term of imprisonment.” Prosecutors asked Holwell last week to unseal some of the medical information Rajaratnam has submitted to the court.
Federal sentencing guidelines aren’t binding and are often set aside. U.S. judges in Manhattan imposed sentences below the guideline range in almost half of the cases in the year ended June 30, 2010, according to Sentencing Commission statistics.
As of February, almost half of the 43 defendants sentenced for insider trading in the New York court from 2003 to 2010 avoided jail altogether, according to a Bloomberg analysis of court records. Many of those defendants cooperated with the government or pleaded guilty, which often results in a lesser sentence. Since then, judges have sentenced those convicted in the Galleon case to prison terms that average three years.
The longest insider-trading sentence before Galleon was 10 years, given to former Credit Suisse Group AG banker Hafiz Muhammad Zubair Naseem, who was convicted in 2008 of leading a $7.8 million scheme. Since then, former Galleon trader Zvi Goffer was also sentenced to a 10-year term.
U.S. District Judge Richard Sullivan sentenced Goffer last month for leading a ring that bribed lawyers for inside tips about transactions involving their law firm’s clients. Craig Drimal, another ex-Galleon trader, was sentenced to 5 1/2 years in prison. Danielle Chiesi, a former analyst at New Castle Funds LLC, got 2 1/2 years for passing tips to Rajaratnam and others. Drimal and Chiesi both pleaded guilty.
Holwell will likely consider the sentences given to other participants in Rajaratnam’s scheme, though Boss of Cozen O’Connor said the lesser terms given underlings may not help.
“I would be very surprised if Rajaratnam doesn’t get more than the individuals who are less culpable,” he said.
The case is U.S. v. Rajaratnam, 09-01184, U.S. District Court, Southern District of New York(Manhattan).
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