Wednesday, 1 April 2015
Last updated 3 min ago
Oct 13 2011 | 3:28pm ET
The 11-year sentence for insider trading handed down to Galleon Group founder Raj Rajaratnam on Thursday was the longest ever imposed by a U.S. court for the offense, but there are questions as to just how effective such sentences are in dissuading would-be white collar criminals.
Former Assistant U.S. Attorney Glenn Colton told FINalternatives that while he believes “the specter of real prison time is a deterrent,” he doesn’t believe that’s true “on the margin.”
“I don’t think that if somebody knew that they’d be destitute, disgraced, barred from the securities industry and spending five years in prison, versus all of that and serving eight or nine years in prison, that marginal deterrence is significant at all,” said Colton, who spent 10 years as federal prosecutor in New York's Southern District.
The U.S. Justice Department certainly thinks it is—prosecutors had sought a sentence between 19 years and seven months and 24 years and five months for Rajaratnam, arguing it was warranted both to punish the hedge fund billionaire and to “deter others” from engaging in insider trading.
Under federal sentencing guidelines passed in 1987, the severity of sentences in white collar cases is linked to the dollar value of the crime. But calculating that value is not necessarily a straightforward process:
“The primary driver of the recommended guideline sentence in white collar cases is the ‘loss amount,’” said Colton, “which is either the actual loss or intended loss caused by the crime. But the increase in the offense level based on the amount of loss goes up at a dramatic rate.”
“Also, frequently the government pushes theories of loss that are aggressive.…For example, in an insider trading context, the government often says, ‘Well, you bought for $1, you sold for $5, so it’s $4 a share loss,’ without considering the other factors that may have contributed to the gains that you had, whether it be market forces, unexpected positive performance by the company, whatever it may be.”
“So, you have two things driving the sentence very high, both the way the guidelines are constructed and what the judge’s recommended starting point is going to be plus the way in which the government aggressively calculates the loss that then drives up the recommended sentence,” said Colton.
In Rajaratnam’s case, the government estimated his insider trading had generated profits or avoided losses of $72 million.
Colton, who is now a partner at the law firm SNR Denton, says he was not surprised by the length of the sentence given the hedge fund billionaire. He says he thinks federal judge Richard J. Holwell tried to balance “the severity of the crime” with concerns over too-long sentences for white collar crimes.
“I think the judge…really needed to come out somewhere in the middle and also really needed to come out with a longer sentence than what Zvi Goffer [a former Galleon trader convicted of leading one of two insider trading rings at the firm] got at 10 years and so really, the 11 is in the range of a serious sentence that I would have expected.”
The judge also took into account Rajaratnam’s health issues—he suffers from advanced diabetes and will likely need a kidney transplant—and his charity work, but the resulting sentence was still much stiffer than that sought by the former Galleon Group head’s lawyers, who will appeal it. In doing so, they are expected to question the government’s use of wiretaps to build their case against Rajaratnam.
“As I understand it,” said Colton, “there are substantial questions about…the legal propriety of using a wiretap in a securities fraud case. I think what the government does is say, ‘Well, technically that’s not allowed but we’re also charging wire fraud or mail fraud and you can in those situations.’”
“But the big issue, as I understood it from the hearings that were held before trial, was the question of necessity—in order to get a wiretap you have to…demonstrate to the district judge who signs the wiretap order that less intrusive means have been tried and are ineffective because, obviously, listening to all phone calls or reading all emails is far more intrusive than…taping isolated calls with an informant or taping isolated meetings,” he said.
“In this case, I think there’s an argument that the defense will be putting forward that this was not necessary to investigate and prove the crime. Whether that will be successful or not I don’t know.”
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