Raj Rajaratnam's historic insider trading sentence.

Author:Driggers, Anna


On May 11, 2011, a jury found Raj Rajaratnam, chief of the Galleon Group hedge fund, guilty of securities fraud and conspiracy to commit securities fraud in an elaborate insider trading scheme. (1) On October 13, 2011, Judge Richard Holwell (2) of the Southern District of New York sentenced Rajaratnam to eleven years in prison, the longest sentence ever imposed for insider trading. (3) Judge Holwell also fined Rajaratnam $10 million and ordered him to forfeit $53.8 million in profits. (4) In a related civil suit by the Securities and Exchange Commission ("SEC"), Rajaratnam was ordered to pay an additional $92.8 million in civil penalties and was permanently enjoined from violating securities laws. (5) Rajaratnam's conviction was based on several different instances of insider trading in the 2000S. (6) Prosecutors built their case against Rajaratnam during a thirty-two month investigation featuring wiretaps and cooperating witnesses, (7) the first time the government used wiretaps to record phone calls in an insider trading case. (8)

Rajaratnam's unprecedented sentence, coupled with the novel measures taken by prosecutors, will send a message to Wall Street and deter potential white collar

criminals. (9) The sentence and tactics employed were not intended to make Rajaratnam a scapegoat for the financial crisis, (10) but were instead based on the legitimate goals of deterrence and punishment due to the massive scope of his illegal conduct, (11) Due to the success of the investigation of Rajaratnam and the likelihood that insider trading schemes will employ wire fraud, (12) the government will likely use wiretapping again in future investigations, provided that appellate courts uphold the use of wiretap evidence for insider trading when incident to wire fraud investigations, and that the conduct of the suspect justifies the expense of an extensive investigation.

Part I of this note will examine American law governing conspiracy and insider trading to explain the elements of the crimes. Part II-A will consider the testimony and evidence that arose in Rajaratnam's trial. Part II-B will detail the government's investigation of Rajaratnam's conduct and its use of Title III wiretaps. Finally, Part III will argue that Rajaratnam's lengthy sentence is for legitimate criminal punishment reasons, and not an attempt to use Rajaratnam as a scapegoat for the financial crisis. Trends in white collar sentencing generally, as well as the impact of investigations featuring wiretapping on insider trading, will be discussed.


    Prosecutors charged Rajaratnam with five counts of conspiracy to commit securities fraud and nine counts of securities fraud. (13) The conspiracy charges concern Rajaratnam's agreement with other individuals to commit securities fraud, and the securities fraud charges reflect Rajartnam's commission of the substantive offense of insider trading, a type of securities fraud. (14) The jury found Rajaratnam guilty on all counts. (15) Each of these claims required the government to prove certain elements in order to obtain a conviction. I will analyze these claims and their requirements in turn, and discuss how prosecutors met the requirements in this case. In addition, I will discuss federal sentencing for these crimes and how it has changed over time.

    1. Conspiracy to Commit Securities Fraud

      Conspiracy is a general crime that applies when an individual plans to commit an offense or to defraud the United States. (16) The conspiracy statute is violated when defendants commit crimes through the use of the means and instrumentalities of interstate commerce, of the mails, or of facilities of national securities exchanges. (17) To establish a conspiracy claim, the government must demonstrate that there was (i) an agreement between two or more persons to commit an unlawful act, (ii) the defendant had knowing and intentional membership in the conspiracy, and (iii) there was an overt act committed in furtherance of the conspiracy. (18) Violation of the conspiracy statute in an insider trading case like Rajaratnam's requires an agreement to pass insider information to a tippee, in this case Rajaratnam, and possibly to another person. (19) A tippee is a person who obtains material nonpublic information from an individual who has a fiduciary relationship with the company the information is about (an insider). (20) Information may be passed from an insider directly to a tippee, and/or from this intermediate tippee, who received the information directly from the insider, to a remote tippee, even if the insider and the remote tippee do not know one another. (21)

      Prosecutors may use circumstantial evidence to prove the existence of a conspiracy and the defendant's participation in it with the required knowledge and intent. (22) Circumstantial evidence that can support an insider trading conspiracy conviction includes access to information, the relationship between the tipper and tippee, timing of the contact between the tipper and tippee, timing of the trades, pattern of the trades, and attempts to conceal the trades or relationship between the tipper and tippee. (23) For example, linking trading records with records of telephone conversations to conclude that individuals engaged in insider trading is adequate circumstantial evidence to prove conspiracy to trade on the basis of inside information. (24)

      A sentence for conspiracy may not exceed five years. (25) Sentences for conspiracy vary based on the underlying substantive crime that the defendant conspired to commit; the Federal Sentencing Guidelines range for conspiracy may be an independent range, or it may be grouped with the range for the substantive crime. (26) Conspiracy to commit securities fraud is an offense for which the conspiracy and substantive crimes are grouped together. (27)

      Rajaratnam violated the conspiracy statute when he knowingly exchanged material, nonpublic information with other people with the understanding that one or both of them would trade public securities based on this information, actions which would constitute insider trading when carried out. In this case, prosecutors presented circumstantial evidence of Rajaratnam's telephone communications with other insiders, which were followed shortly afterwards by trades proving Rajaratnam's conspiracy to engage in insider trading. (28) Mr. Rajaratnam received a sentence of sixty months for the five counts of conspiracy, the maximum permitted by the statute, in addition to the seventy-two month sentence for his conviction on the nine counts of substantive securities fraud. (29)

    2. Insider Trading

      Insider trading is a white collar crime governed by the Securities and Exchange Act of 1934 and the Act's implementing rules in the Code of Federal Regulations. (30)

      The rule prohibits individuals from using interstate commerce, the mail, or a national securities exchange to (i) use a device, scheme, or artifice to defraud, (ii) to make any untrue or misleading statements of material fact, or (iii) engage in any conduct that would be a fraud or deceit on a person in the purchase or sale of any security. (31) When a corporate insider trades securities of his corporation on the basis of material, nonpublic information, that trading qualifies as a deceptive device under the rule. (32) The materiality of information depends on the probability that the event mentioned in the information will occur and the anticipated magnitude of the event in relation to the company's activity. (33)

      Recipients of nonpublic information from insiders, known as tippees, are also liable for violations of the insider trading laws. (34) A defendant is liable as a tippee when (i) the tipper, who is the corporate insider sharing insider information, possessed material nonpublic information regarding a publicly traded company, (ii) the tipper disclosed this information to the tippee, (iii) the tippee traded in securities while in possession of the information, (iv) the tippee knew that the tipper had violated a fiduciary duty by providing the information to the tippee, and (v) the tipper benefitted from the disclosure of the information. (35) Corporate insiders include employees of the corporation as well as individuals with temporary access to inside information, including underwriters, attorneys, accountants, consultants, and others who are temporary fiduciaries of the corporation. (36) The tippers may benefit by receiving pecuniary gain, a positive reputation in the eyes of the tippee, or personal friendship between the tipper and tippee from sharing the inside information. (37)

      Typically, the SEC investigates insider trading cases by issuing subpoenas for documents, taking depositions, and interviewing witnesses. (38) The SEC can issue subpoenas to firms like the Galleon Group, individuals, banks, clearing houses, telephone companies, and issuers of publicly traded securities. (39) The information produced pursuant to subpoenas may include trading records, bank records, phone records, emails, instant messages, text messages, hard drives, and contact lists. (40) The SEC can obtain this information with its civil enforcement or administrative power, but the SEC lacks criminal prosecutorial power. (41) As a result, the SEC turns cases over to the United States Attorney's Office ("USAO') and the Federal Bureau of Investigation ("FBI") for criminal enforcement. (42)

      Criminal punishment for white collar crimes has evolved over time. Before the 1980s, punishment for white collar crimes, including insider trading, frequently did not include a prison sentence. (43) However, beginning in the late 1980s, changes in the federal sentencing system and financial scandals involving publicly traded companies led to increased severity in white collar crime punishments. Congress created the United States Sentencing Commission ("Sentencing Commission") pursuant to the Sentencing Reform Act...

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