When disgraced hedge-fund titan Raj Rajaratnam is sentenced in federal court Thursday, he will come up against a hard and unavoidable truth: Insider traders are facing considerably harsher sentences than they did in the past.
Mr. Rajaratnam, Wall Street's latest symbol of perfidy and excess, is expected to receive among the longest-ever U.S. prison terms for his role in one of the biggest U.S. insider-trading cases ever, lawyers say.
A higher percentage of those found guilty of such crimes are receiving significant time behind bars than in the past, according to a Wall Street Journal analysis. In the past two years, defendants sent to prison on insider-trading charges in New York federal courts have received a median sentence of about 2½ years, according to the Journal analysis of white-collar sentencing data from court records and archives involving 108 cases. Just Wednesday, hedge-fund trader Michael Kimelman was sentenced to 2½ years in prison for inside trading.
Raj Rajaratnam, founder of hedge fund Galleon Group, was convicted of 14 counts of securities fraud and conspiracy in May. Prosecutors are seeking a sentence of 19 years and seven months to 24 years and five months in prison in what they said was a "brazen" and "arrogant" scheme to corrupt friends and corporate insiders to leak nonpublic information about their companies. (Photo: Brendan McDermid/Reuters)
Danielle Chiesi, a former consultant to hedge-fund firm New Castle Fund, was sentenced in July to 30 months in prison, for sharing confidential tips with her boss and other portfolio managers, including Galleon Group's Mr. Rajaratnam. Ms. Chiesi, a former beauty queen, allegedly used her powerful business contacts to obtain inside information about International Business Machines Corp., Advanced Micro Devices Inc. and other companies. She pleaded guilty to three counts of conspiracy to commit securities fraud. (Photo: Rick Maiman/Bloomberg)
Samuel Waksal, the founder of ImClone Systems Inc., was sentenced to seven years and three months in prison in 2003 after he pleaded guilty to telling family members and others to sell their shares in the biotech firm after he learned the Food and Drug Administration had rejected its cancer drug, Erbitux. He spent about five years in prison and was released in 2009. Homemaking maven Martha Stewart was also convicted of obstruction of justice related to the sale of her ImClone stake in 2001 after receiving a tip from her broker, who was also Mr. Waksal's broker. She served five months in prison. (Photo: Spencer Platt/Getty Images)
Michael Milken, the former head of Drexel Burnham Lambert Inc.'s junk-bond department, was sentenced to 10 years in prison after he pleaded guilty in 1990 to six felony violations of federal securities laws, but not insider trading, in an infamous insider-trading probe. Mr. Milken's sentence was later reduced after he agreed to cooperate with prosecutors and he served 22 months in prison. (Photo: Gerald Herbert/Associated Press)
For a list of some recent and infamous cases involving insider trading Click HERE.
Those sentences compare with a median sentence of 18 months in the past decade and 11½ months from 1993 to 1999, according to the Journal analysis.
Meanwhile, a higher percentage of guilty insider-trading defendants on Wall Street and in corporate America have been incarcerated in recent years, according to the analysis. In the past two years, 79% of defendants sentenced in New York have been sent to prison, compared with 59% in the 2000s and less than half from 1993 to 1999, the analysis shows.
Of course, every case is based on a different set of facts, so it can be difficult to make a direct comparison between sentences. But prosecutors and white-collar lawyers view the lengthier insider-trading sentences these days as an additional deterrent amid one of the largest government crackdowns against illicit trading ever on Wall Street.
The stiffer insider-trading sentences come as prosecutors have increasingly used techniques, such as wiretapping, that once were employed mostly for drug or terrorism cases. That tactic has led to evidence, including recorded calls, that has been more difficult for defendants to refute. And it has led to broader alleged rings of inside traders.
At the same time, federal sentencing guidelines have placed a sharper focus in recent years on the alleged gains from a white-collar defendant's crimes, lawyers said.
The guidelines—which no longer are mandatory following a 2005 U.S. Supreme Court decision—continue to influence many judges, lawyers say.
In Mr. Rajaratnam's case, federal prosecutors in Manhattan are calling for a prison sentence of from 19 years and seven months to 24 years and five months after the 54-year-old founder of Galleon Group was convicted earlier this year in what prosecutors called a "brazen," "arrogant" and "pervasive" insider-trading scheme that the government says corrupted corporate directors, friends and former classmates.
Mr. Rajaratnam's lawyers have argued that U.S. District Judge Richard Holwell shouldn't count all of the alleged illicit profits or losses avoided by Galleon against him at sentencing and that he should receive leniency for an undisclosed medical condition.
Even if Judge Holwell accepts that argument, Mr. Rajaratnam's prison term could exceed 10 years, legal experts said, the longest sentence imposed for insider trading in New York in the past two decades.
Representatives for Mr. Rajaratnam and the Manhattan U.S. attorney's office declined to comment.
By comparison, the median prison sentence for robbery was five years and three months in this fiscal year's first three quarters ending in June, according to the U.S. Sentencing Commission. The median sentence for kidnapping during that period, according to the commission's numbers, was 19 years and seven months, the low end of the government's range for Mr. Rajaratnam.
Click Image To View Interactive Chart
Defendants with 10 years or more remaining on their sentences are barred from the "minimum-security" prison camps typically associated with white-collar defendants. So, in addition to a lengthy sentence, Mr. Rajaratnam is likely to serve some of his prison term in a "low-security" prison, lawyers said, or one with higher security.
And since parole has been abolished in the federal system, white-collar defendants must serve 85% of their prison time. Sentences can be reduced to that point based on good behavior behind bars.
"The idea of 'Club Fed' has gone by the wayside," said Todd A. Bussert, a Connecticut lawyer and prison specialist.
Mr. Rajaratnam's case is the culmination of a broad government effort to root out improper sharing of nonpublic information among corrupt corporate insiders and Wall Street professionals. Of 54 hedge-fund managers and others charged since 2009, 50 have pleaded guilty or been convicted of criminal charges.
Mr. Rajaratnam's sentence also could foreshadow harsher prison terms for insider trading in the future, as politicians and prosecutors continue to push for tougher punishments for perpetrators of financial crimes, lawyers said.
The trading scandal at UBS will ensure that tough regulation on banks is here to stay. The combustible mix of greater regulation and economic uncertainty will shape the future of finance for decades, according to Francesco Guerrera on The News Hub.
Preet Bharara, the U.S. attorney in Manhattan, asked the U.S. Sentencing Commission earlier this year to consider additional factors that might drive the sentencing range higher for instances of "sophisticated insider-trading conduct" and for engaging in "a course or pattern of insider trading."
"Insider trading has become increasingly complex and difficult to detect," said Mr. Bharara in testimony before the sentencing commission in February.
Still, some defense lawyers believe the harsher insider-trading penalties often don't fit the crimes.
"You have to ruin lots of people's lives to justify that kind of punishment," said Ellen Brotman, a white-collar defense lawyer at Montgomery, McCracken, Walker & Rhoads LLP in New York. "You have to kill people or decimate people's lives."
Click Image To View Interactive Chart
In the past, insider trading resulted in little prison time except in the most brazen cases. Half of 84 defendants sentenced for insider trading in the Southern and Eastern Districts of New York from 1993 to 2009 received prison terms of three months or less, according to the Journal analysis. In the past two years, however, half the 24 defendants sentenced in New York for insider trading received prison terms of two years or more.
For example, Zvi Goffer, a former Galleon trader, was sentenced to 10 years in prison in September for insider trading; his brother received a three-year prison term last week.
In an infamous insider-trading investigation, Michael Milken, the former head of Drexel Burnham Lambert Inc.'s "junk"-bond department, pleaded guilty in 1990 to six felony violations of federal securities laws, but not insider trading. He was sentenced to 10 years in prison, but that sentence was later reduced after he agreed to cooperate with prosecutors in their investigation of others. He ultimately served just 22 months in prison.
Former arbitrager Ivan F. Boesky, who pleaded guilty to conspiracy, but not insider trading, in the probe in 1987, also served 22 months of a three-year sentence.
COMMENTARY: I've been covering the insider trading cases of Raj Rajaratnam, the billionaire founder of Gallon Group, and the notorious Danielle Chiesi, a trader cum-whore at New Castle Fund going back to October 2010.
If you look at the above Galleon's Web chart, you will find that insider trading was furnished by a number of informants, passed on to others, and several dozen individuals were implicated, charged and have been all fined and sentenced to lengthy prison terms. I am glad that the SEC has really started to investigate and put these punks in prison for lengthy prison terms.
I am looking forward to the sentencing for Mr. Rajaratnam who has pleaded for a reduced prison term and a cell at a country club prison. The Justice Department is asking for the maximum prison term of 19+years. Can hardly wait to see when Mr. Rajaratnam is handcuffed and escorted to a jail cell before being transferred to a maximum security federal penitentiary, where the hardcore criminals and rapists will be able to get their hands on his virgin ass and he becomes a "bitch" for one of the prison thugpins.
I will update this post just as soon as I hear what the final prison sentence is.
Courtesy of an article dated October 13, 2011 appearing in The Wall Street Journal
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