Saturday, October 15, 2011

Hedge Fund Magnate Raj Rajaratnam Sentenced To 11 Years In Prison For Insider Trading

On Thursday, disgraced billionaire hedge fund manager Raj Rajaratnam was sentenced to 11 years in federal prison for insider trading. Rajaratnam’s sentence represents the longest criminal sentence ever handed out in the United States for insider trading.

Federal prosecutors sought a heftier sentence in the range of 19 to 24 years according to federal sentencing guidelines. Rajaratnam’s lawyers argued for a sentence in the 6 to 8 year range, arguing that insider trading is a victimless crime. Judge Holwell cited a number of factors in mitigating Rajaratnam’s sentence. Among these mitigating factors, Judge Holwell identified Rajaratnam’s financial support of victims of the tsunami in Sri Lanka, Rajaratnam’s native country, victims of the major earthquake in Pakistan several years ago, and his support of victims of the September 11th terrorist attacks. Rajaratanm’s health also factored into the mitigation of his sentence; Rajaratnam suffers from advanced diabetes and kidney failure.

Previously, I wrote on this blog about the unprecedented and first-time use of wiretaps to convict Raj Rajaratnam, the then head of the Galleon Fund. The SEC and federal prosecutors have been very aggressive in their crackdown on “expert networks” and insider trading generally. Raj Rajaratnam’s conviction and sentence marks a growing trend to increase jail time and other penalties meted out to white collar criminals based on the monetary impact of their crimes. Rajaratnam’s sentence sends a stern message that insider trading does not pay. We might never see insider trading come to an end on Wall Street. However, one thing is certain, Wall Street titans will be careful to watch what they say and the conversations that they keep. What are your thoughts? Should Rajaratnam have received the maximum sentence? Is insider trading really a victimless crime?


  1. Jessie C. (Memphis Law)October 15, 2011 at 7:02 PM

    I don't think that insider trading is a victimless crime at all. In fact, the recent financial market proves that decisions and actions on Wall Street affect everyone. I think that the court was correct to use a harsher sentence, and I believe that it will be a common trend for all business coruption cases in the near future.

  2. with insider trading being harshly punished in this instance, i am left to wonder why there has not been a single arrest or prosecution for the fraud that precipitated the mortgage crisis of 2008. it is as if wall street has "rebooted" and is claiming that all is well again.

    occupy wall street seems to be capturing the disaffect of all those frustrated by the failure of AG's around the country and the DOJ to hold individual's accountable for their role in the financial crisis.

  3. Spencer (Memphis Law)October 18, 2011 at 3:52 PM

    I don't buy the argument that insider trading is a victimless crime. There's a reason it's a crime in the first place. The victims would be public investors in the general population who were put at a disadvantage. As for the mitigating circumstances, I don't agree with the judge's assessment. Raj's acts of benevolence were not related in any way to the people involved in his insider trading actions. I would have only taken his health into account.

  4. Rajaratnam should have received the max sentence for a number of reasons. First, I feel that Rajaratnam is as much of a scape goat as he is anything. Insider trading in one form or another is commonplace in the world of hedge funds. If the government is trying to make an example out of him, eleven years is really not much of a deterrent. If the risk of eleven years (after application of some mitigating factors of course) in prison is the trade off for making millions of dollars, many traders are likely to take that risk.
    Second, insider trading is far from a victimless crime. Insider trading creates a more uneven playing field than already exists in the financial markets. The quality of research and high frequency trading that hedge funds have access to already put the common investor at a disadvantage. Insider trading further destroys the confidence that common investors may have in the market. Furthermore, many retired investors depend on the income generated by their stock holdings and much of their wealth may be tied up in the market. This income and wealth can be greatly compromised due to insider trades.

  5. Caroline (Memphis Law)October 18, 2011 at 10:59 PM

    Insider trading is not a victimless crime. Although you might not be physically hurting someone you are hurting the fairness of the market and the people competing against you. It is cheating. Just like if you were to cheat on a test and get a better grade than someone else and get placed higher in the class and have a better chance of getting a job... insider trading can lead to one company dominating a certain market and all other companies having a disadvantage in the market. Insider trading does not make you a smart and savy businessman who is successful. Insider trading shows that you have no other way to determine if an investment is good or not so you resort to cheating. In the long run you are only cheating yourself and the company you work for. I think the maximum sentence was exactly the right amount of jail time.

  6. Natasha (Memphis Law)October 24, 2011 at 12:40 AM

    Illegal insider trading is not a victimless crime. The victims of illegal insider trading are unsuspecting shareholders and investors.
    Controlling shareholders and directors breach their fiduciary duties of loyalty to other shareholders because they’ve secretly misappropriated a company’s proprietary information for their own financial gain at other shareholders’ expense.
    Other victims of illegal insider trading can be unsuspecting investors. Illegal traders use undisclosed information to quickly sell their shares to unsuspecting investors who only later come to realize that they’ve bought shares that rapidly decreased in value. Such inequitable access to information can result in decreasing consumer confidence in the stock market.
    Since illegal insider trading destroys loyalty to other current shareholders and since such trading has the effect of disrupting consumer confidence in the stock market, I would support the maximum sentence to deter this practice.

  7. While I agree that insider trading is not a victimless crime, the portion of the post that is most bothersome to me is the mitigating factors cited by Judge Holwell. I take issue to the use of these mitigating factors for two reasons. First, mitigating factors should be factors that point out the good character or qualities of a defendant, while enhancement factors point out the true evil nature of the defendant. Donating monetarily is not an individual characteristic that sets Rajaratnum apart from other hedge fund managers or even the rest of the public in general. I would argue that the majority of individuals (even broke law students) donate money to certain causes. The fact that an individual donated funds towards efforts of rebuilding Louisiana should not be a mitigating factor for an armed robbery charge.
    Second, allowing for monetary donation to count as a mitigating factor allows all hedge fund managers to take advantage of the system. For example, an attorney for a hedge fund manager would advise his client to be sure to donate funds towards any major disaster relief funds (without actually partaking in the insider trading crime). While a hedge fund manager is partaking in insider trading, he could be building up “mitigating points” by donating a small portion of his large funds to causes that make them appear more caring and sympathetic to a sentencing judge.

  8. Jessie C Memphis LawNovember 21, 2011 at 7:51 PM

    As my previous comment states I don't think that insider trading is a victimless crime at all. It hurts the corporation by misappropriating information that was given to the individual as an agent of the company. Therefore, there is a breach of fiduciary duty. Also, there would be a possible Section 16(b) claim on the part of other investors that traded with Raj because he was trading on infomration unavailable to the other investor.

  9. Raj definitely should have received the max sentence. Insider trading in no way can be construed sensibly as a victimless crime. Perhaps he will set an example for others who would be otherwise so inclined. I also think there should be harsher sentences for those who know of the crime but remain silent. With the Penn State scandal as of late, I've come to think remaining silent may be just as bad as committing the crime yourself.

  10. Kristie is right in that insider trading cannot be construed as a victimless crime. Members of the general public, who do not have access to this information, are victimized because they are not given the opportunity to profit or reduce loss in the same manner as insiders. Though not mentioned in this blog post but perhaps relevant, I would like to see some discussion of insider trading done by politicians? A recent Newsweek issue disclosed profits (significant in magnitude, often) obtained by members of Congress on both sides of the aisles.

  11. Lindsey G (Memphis Law)November 28, 2011 at 7:30 PM

    I echo the general sentiment of the above posts. Insider trading is hardly a victimless crime. People who engage in insider trading know the type of harm their deception creates but they engage in it anyways. Billionaire hedge fund managers such as Rajaratnam disregard the great amount of harm they could bring to millions. Their complete disregard for how their actions affect people is reason enough for them to get jail time. I commend Rajaratnam for giving financial support to tsunami, earthquake and 9/11 victims, but I do not believe that doing those things alone justify allowing him to receive a lighter sentence for deceiving millions of others. I agree with Randall that 11 years is not much time if the government wishes to make an example out of Rajaratnam. If the government truly wishes to deter this type of behavior, a maximum sentence (in a real prison- not a “country club” prison) would be the way to do it.

  12. Franklin A (Memphis Law)November 28, 2011 at 10:04 PM

    Rajaratnam should have received the maximum sentence for his crimes if the government is, in fact, sincere about protecting investors and society at large. Even if you don't invest in a hedge fund, when several fail, the effects can be broad. It the government handed out lengthly sentences and imposed stiff punitive damages, the government actually might be able to curb insider trading abuses. Insider trading a victimless crime? Then what are the countless individuals who lost their life savings from these types of situations?

  13. FalenC (Memphis Law)November 28, 2011 at 11:12 PM

    Rajaratnam should have received the maximum sentence. I almost laughed at the idea that insider trading is a victimless crime. Is there even such a thing as a "victimless crime?" If insider trading was not a huge issue, there would not be laws against it. Insider trading clearly hurts everyone on the "outside" who is not able to take the same advantages that the inside traders are able to take due to the knowledge that is available to them. We have laws against this for a reason!

  14. Gray N. Memphis LawNovember 29, 2011 at 9:07 AM

    Insider trading is a victimless crime? I don't buy that argument at all. According to the New York Times article, "Prosecutors accused Mr. Rajaratnam of using a corrupt network of well-placed tipsters — including former executives of Intel, I.B.M. and the consulting firm McKinsey & Company — to illicitly gain about $72 million through his stock trading." The 72 million dollars that Rajaratnam received as a result of his insider trading is money that should have gone to honest investors and people who do not cheat the system. Those honest investors are the victims. Also, I was a little surprised that an 11-year sentence was the longest ever prison sentence for insider trading. I guess it goes to show that our country still does not place a premium on punishing financial crimes.

  15. Andrew F (Memphis Law)November 29, 2011 at 12:01 PM

    Insider trading is not a victimless crime, but it shouldn't carry a lengthy prison sentence.

  16. Insider trading is not a victimless crime. It's existence deters the "average American" from investing in the stock market and thus stagnates economic growth for the whole country. Effectively, everybody is a victim.

  17. Melissa T (Memphis Law)November 29, 2011 at 1:01 PM

    I agree that insider trading isn't a victimless crime but it is also hard to say that violators deserve life terms in prisons. Wouldn't society be better served if all of their money was taken away and they were forced to do something good with their talents (i.e community service)?