Guest Post: Longest Prison Term for US Insider Trading Case

The conviction of former hedge fund manager Raj Rajaratnam has once more brought attention to the complex and secretive world of private investment banking. “Insider trading” is again a buzzword from online news to PhD programs. A federal jury had previously found Rajaratnam guilty of 14 counts of securities fraud and conspiracy perpetrated over a seven-year period at the Galleon Group hedge fund. His trial lasted approximately two months, although Rajaratnam had been arrested back in October 2009.

Mr. Rajaratnam is a Tamil-American who obtained his master’s degree in business administration from the prestigious Wharton School in the early 1980s. While working as a research analyst at Needham & Company he started a technology hedge fund that would later become Galleon. Rajaratnam’s Diversified Fund was reported to have a net annualized return of 22.3% in 2009, skyrocketing him among the elite of US money managers.

According to prosecutors from the US Attorney’s Office for the Southern District of New York, Rajaratnam’s sentence is the longest ever imposed for insider trading. Despite the unusually long sentence he faced, Rajaratnam chose not to say anything on his own behalf. This silence was in line with Mr. Rajaratnam’s demeanor in court and in public since he was arrested two years ago.

During the trial, presiding Judge Richard Holwell once referred to insider trading as “a virus that needs to be eradicated.” On the other hand Rajaratnam’s defense team insisted their client’s crime was victimless and that no one lost money as a result. For all the news media attention insider trading gets, it remains a white-collar crime not many people fully understand.

In the United States, insider trading refers to the practice of buying or selling publicly traded securities based on material information that isn’t publicly available. The criminal release and acquisition of insider information often occurs in secrecy and violation of fiduciary trust. However, insiders need not be corporate directors or individuals to whom fiduciary confidence is entrusted. Any person who knowingly comes across material, non-public information and trades securities based upon that insider information is in violation of federal law and regulations set forth by the Securities and Exchange Commission.

The case brought against Rajaratnam by the Securities Exchange Commission and the US Attorney was supported by strong evidence: the FBI wiretapped the hedge fund manager’s cell phone for most of 2008. The investigation was expansive in its magnitude, stretching from Galleon’s oak-paneled headquarters in New York City to the corporate parks of Silicon Valley in California. More than 20 people have been arrested as a result. Most have pled guilty and received sentences far lighter than Rajaratnam’s 11-year prison term.

Prosecutors estimated Rajaratnam pocketed up to $75 million in profits from insider trading of stock in ATI Technologies, Clearwire Corporation, Google, Intel, and others. One of Rajaratnam’s most notorious trades involved a former Goldman Sachs director. In 2008, Rajat Gupta passed significant information to Rajaratnam concerning a $5 billion investment from Warren Buffett in Goldman Sachs. That investment by Berkshire Hathaway was instrumental in helping Goldman Sachs avoid the fate of Lehman Brothers during the collapse of the credit markets in 2008.

Mr. Rajaratnam has been given 45 days to get his affairs in order prior to reporting to prison. His defense team plans to appeal the sentence. Though he was expected to receive more than 20 years imprisonment, Judge Holwell took into consideration Mr. Rajaratnam’s delicate state of health: he suffers from advanced diabetes and faces possible kidney failure.

In addition to jail time, Judge Holwell imposed a $10 million fine and a forfeiture of $53.8 million. Even after the Galleon fund folded in 2009, the 54-year-old former fund manager kept investors in the black. Galleon investors were returned their funds and profits in an orderly manner upon Rajaratnam’s arrest.

Guest author ELAINE HIRSCH is a jack-of-all-interests, from education and history to medicine and videogames. This makes it difficult to choose just one life path, so she is currently working as a writer for various education-related sites and writing about all these things instead.