Hedge-fund magnate Raj Rajaratnam got the longest-ever prison sentence for insider trading, but the government may not have landed a knockout blow against the pervasive Wall Street crime.
Rajaratnam’s 11-year term far surpasses those dished out to past Wall Street kingpins accused of swapping illegal information, such as Ivan Boesky. And it will keep Rajaratnam, 54, incarcerated until he’s old enough to collect Social Security.
But some experts said the government failed in its broader effort to establish insider trading as an especially egregious crime warranting the harshest-possible white-collar sentence.
Despite an intensive and costly prosecution that included the first use of wiretaps in an insider case, the sentence Thursday fell well short of the 19 to 24 years sought by the government.
It was far less than the prison terms given to other prominent white-collar offenders — such as former WorldCom Inc. chief Bernard Ebbers, who got 25 years. And it was even more lenient than the sentences recently meted out to lesser-known figures for other types of financial crimes, such as the 30 years given to former mortgage executive Lee Farkas.
“The government was really attempting to frame this as one of the nation’s worst recent white-collar crimes, and the judge effectively rejected that position,” said John Hueston, a former federal prosecutor who helped lead the government’s pursuit of Enron Corp. executives Kenneth Lay and Jeffrey Skilling.
“This is a mixed result at best for the government,” said Hueston, a partner at Irell & Manella in Los Angeles. “On one hand, they can trumpet the longest sentence ever for someone involved in insider trading. But on the other hand, this was the costliest, most high-profile investment of resources in an insider-trading case.”
Rajaratnam’s was the most prominent insider-trading case in a generation, and he was the central figure in a probe that revealed a web of insiders exchanging secret information at the highest levels of corporate America.
The head of the Galleon Group hedge fund was arrested in October 2009 on allegations that he made more than $50 million in illicit profits by acting on tips provided by contacts at firms such as Goldman Sachs Group Inc., McKinsey & Co. and Google Inc.
He was convicted in May on 14 counts of conspiracy and securities fraud following a two-month trial.
Prosecutors called Rajaratnam the “modern face of illegal insider trading” and said a stiff sentence was necessary to help curtail an insider-trading problem they said has grown rampant.
In handing down the sentence and $10-million fine, U.S. District Judge Richard J. Holwell said Rajaratnam’s conduct “reflects a virus in our business culture that needs to be eradicated.”
Holwell said Rajaratnam’s record of charitable giving and his struggles with several complicated health problems played into the more lenient sentence. The judge revealed that Rajaratnam suffers from advanced diabetes and may need a kidney transplant.
Holwell said he would recommend that Rajaratnam be put in the medical facilities at the federal prison in Butner, N.C., the same one that houses Bernard Madoff.
Rajaratnam’s sentence is part of a recent trend toward longer prison terms for insider trading violations. In the 1980s, Boesky was sentenced to three years after a much-publicized government investigation.
Rajaratnam’s lawyer, Terrence Lynam, said that even without the maximum sentence, the immense public attention that has been given to the trial ensures that others on Wall Street will think twice before committing similar acts.
Before the sentencing was read out, Lynam, who had suggested a sentence of no more than nine years, said “the sentence that the government seeks is comparable only to murder and is greater than violent dangerous crimes such as manslaughter, kidnapping and sexual abuse.”
Some legal experts said the trial and conviction have already been enough to make the financial world take heed.
“Eleven years is a very long time for someone like Raj, who has lived an extraordinarily comfortable life,” said Ira Lee Sorkin, a New York defense lawyer who represented Madoff.
Several of Rajaratnam’s former employees and colleagues have already been sent to prison in related cases. Most of the other sentences have been significantly less harsh, though a former Galleon trader, Zvi Goffer, was sentenced to 10 years last month.
Holwell rejected Rajaratnam’s request to be released on bail, pending appeal, and ordered Rajaratnam to report to authorities within 45 days. Rajaratnam, who never spoke during the trial, sat next to his lawyer during the proceedings and quietly said, “No, thank you,” when asked by the judge if he wanted to add anything.