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 11^th 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?

Wiretaps Play Pivotal Role in Conviction of Hedge Fund Titan Raj Rajaratnam on Insider Trading Charges

On May 11th Raj Rajaratnam, the embattled head of the Galleon Group, a major hedge fund, was found guilty on 14 counts of securities fraud and conspiracy. At his sentencing in July, Rajaratnam faces many, many, many years in jail. The New York jury that convicted Rajaratnam found that he made nearly $64 million from insider tips he obtained from his vast network of corporate executives and other insiders. Trades Mr. Rajaratnam engaged in effected top companies like Goldman Sachs, Google, IBM, and Intel. Rajaratnam paid handsomely for inside tips and confidential information. During his trial, prosecutors were able to show that Rajaratnam paid Anil Kumar, then an executive at the large consulting firm McKinsey & Co., $500,000 a year for tips about a number of the firm’s clients.

Rajaratnam’s trial lasted several weeks and was one of the highest profile insider trading trials in recent memory. On another point, the Rajaratnam trial was noteworthy. Apparently, this was the first insider-trading case in which governmental prosecutors used wiretaps to obtain information on patterns of insider trading. The wiretaps were pivotal in Rajaratnam’s conviction. On one tape-recording, in a conversation about getting an additional McKinsey executive to leak information, Rajaratnam can be heard telling his brother, Rengan, “[e]verybody is a scumbag.”

Rajaratnam has promised to appeal his conviction. This conviction empowers the SEC. The SEC’s is continuing to crackdown on “expert networks,” which I posted about recently. Several other large hedge fund managers are facing damning charges of insider trading on their own. “In the past 18 months, the US Attorney’s Office has charged 47 people with insider trading. Mr. Rajaratnam is the 35th to be convicted.” The action is picking up. The SEC is currently pursuing criminal and administrative proceedings against other individuals linked to Rajaratnam.

Robert Khuzami, the director of enforcement at the SEC, has indicated that the SEC plans to target hedge funds with “aberrational” performance, which in his estimation means hedge funds that are outperforming the market consistently by 3% or more. The SEC’s top watchdog has exposed his deck of cards. Hedge fund managers better watch out. Only time will tell who gets ensnared in the SEC’s web next. What are your thoughts?