Rajaratnam Faces Sentencing for Directing Hedge-Fund Insider Trading Ring

Galleon Group LLC’s Raj Rajaratnam will be sentenced today for masterminding the biggest hedge-fund insider trading scheme in U.S. history, facing a federal judge who has broad discretion in setting his punishment.

U.S. District Judge Richard Holwell in Manhattan presided over the jury trial in which Rajaratnam was convicted of 14 counts of securities fraud and conspiracy. He will consult federal sentencing guidelines and his own “gut feeling,” one legal expert said. Depending on the result, Rajaratnam, 54, may spend much of the rest of his life in prison.

Holwell will consider additional factors including the sentences given to other defendants in the ring and the utility of “sending a message” to those who might be tempted to trade on illegal inside tips, according to Anthony Sabino, who teaches law at St. John’s University in New York.

“He is supposed to look at everything,” said Sabino, who predicted Rajaratnam will get almost 15 years. “It’s always a matter of discretion or gut feeling.”

Prosecutors called Rajaratnam a “serial insider trader” who illegally made $72 million by corrupting friends and business associates. The government is asking Holwell to sentence Rajaratnam to 19 1/2 years to 24 1/2 years, which, prosecutors said, is the term suggested by the federal guidelines.

Rajaratnam’s lawyers said the government overstated the amount of money their client gained in the fraud and miscalculated other sentencing factors, resulting in a “grotesquely severe” recommendation. Rajaratnam is seeking a sentence “substantially below” the guideline range.

Eight Years

Rajaratnam made only $7.4 million, they said. They 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.

The sentencing guidelines were binding until 2005, when the U.S. Supreme Court ruled that judges may give sentences outside the prescribed range. There is no parole under the federal prison system.

Rajaratnam has also asked for leniency based on medical conditions he said would be life-threatening if he’s sent to prison. He hasn’t publicly disclosed the nature of his ailment, and Holwell has kept court papers discussing it secret.

Rajaratnam was convicted in May. A juror interviewed after the verdict said the 12-member panel never argued that Rajaratnam was innocent, finding him guilty of all 14 counts.

Public Companies

Prosecutors said 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 in the shares of more than a dozen companies, including Goldman Sachs Group Inc. (GS), Intel Corp. (INTC), Google Inc. (GOOG), ATI Technologies Inc. and Clearwire Corp. (CLWR)

Sabino said he would be surprised if Holwell gives Rajaratnam the sentence the government is seeking.

“This is a nonviolent crime,” said Sabino. “He’s not a drug kingpin, he’s not a terrorist, he didn’t murder anybody. And most of all, this is his first offense.”

Holwell is also unlikely to sentence Rajaratnam to eight years or less, according to Sabino. The judge will probably use the sentence to try to deter would-be Wall Street inside traders, Sabino said.

‘Serious Crime’

“A message needs to be sent to the Street,” Sabino said. “This was a very serious crime by Rajaratnam. It must be punished and it must be punished severely.”

In court papers, the government urged Holwell to make an example of Rajaratnam, saying he “represents the worst of illegal insider trading.” Prosecutors compared him to Enron Corp.’s Jeffrey Skilling and WorldCom Inc.’s Bernard Ebbers, convicted in what prosecutors called “the worst of accounting frauds,” and Bernard Madoff, the man behind history’s biggest Ponzi scheme. Skilling was sentenced to 24 years in prison, Ebbers to 25 years and Madoff to 150 years.

Judges have sentenced defendants convicted in connection with the Galleon investigation to an average of about three years. Last month, U.S. District Judge Richard Sullivan gave Zvi Goffer 10 years for leading a Galleon-linked ring that bribed lawyers for inside tips about transactions involving their law firm’s clients. Yesterday, Sullivan sentenced Michael Kimelman, convicted after a trial that included Goffer and his brother Emanuel Goffer, to 2 1/2 years.

Guilty Pleas

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.

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.

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.

Yesterday, prosecutors told Holwell that Rajaratnam shouldn’t be granted bail pending his appeal because he’s a flight risk. Rajaratnam, a naturalized U.S. citizen, has ties to Sri Lanka, where he was born, they said in court papers.

The case is U.S. v. Rajaratnam, 09-01184, U.S. District Court, Southern District of New York (Manhattan).


Source: Bloomberg