Record Sentence for Hedge Fund Founder
Business + Economy

Record Sentence for Hedge Fund Founder

Raj Rajaratnam, the hedge fund billionaire at the center of one of the largest insider trading cases in history, was sentenced Thursday to 11 years in prison, according to the U.S. attorney’s office in Manhattan.

It was the longest prison term in history for insider trading, the federal prosecutor’s office said, and was the culmination of a years-long federal probe of corruption in the stock market. The Rajaratnam case pulled back the curtain on a long-suspected dark side of the hedge fund business.

Rajaratnam, who headed Galleon Management, was convicted in May on 14 counts of conspiracy and securities fraud for illegally using inside information to trade in stocks such as Goldman Sachs, Google, Hilton and Intel. The trading generated profits or avoided losses of $72 million, the government estimated.

Rajaratnam’s crimes “reflect a virus in our business culture that needs to be eradicated,” federal judge Richard J. Holwell said at the sentencing in New York.

“It is a sad conclusion to what once seemed to be a glittering story,” Manhattan U.S. Attorney Preet Bharara said in a news release. “We can only hope that this case will be the wake-up call we said it should be when Mr. Rajaratnam was arrested. Privileged professionals do not get a free pass to pursue profit through corrupt means.”

The 54-year-old was ordered to forfeit $53.4 million and pay a fine of $10 million. Currently out on a $100 million bail, he is scheduled to report for prison on Nov. 28.

The Justice Department opposed allowing Rajaratnam to remain on bail while he appeals, saying he might flee to his native Sri Lanka or some other country. He “would have access to tens of millions of dollars by the mere touch of a keystroke and thus could use that money to live abroad,” the government said in a court filing.

The Associated Press reported from New York that defense lawyers asked that Rajaratnam be allowed togo to the medical facility at the Butner Federal Correctional Complex in North Carolina, where Bernard Madoff is serving his 150-year sentence for running a Ponzi scheme that cheated thousands of people out of billions of dollars.

The sentence was substantially less than the government sought. In an August court filing, the Justice Department proposed a prison sentence of 19 years and seven months to 24 years and five months. Such a term was warranted to “provide just and fair punishment for perhaps the worst insider trading offender (who has been caught to date) in history, and deter others,” the Justice Department wrote.

To build its case against Rajaratnam, the government used tactics traditionally associated with investigations of violent offenses, such as drug dealing and organized crime. Though Rajaratnam did not testify at his trial, the prosecution made extensive use of secretly made recordings of him talking to his associates.

According to the government, Rajaratnam gathered inside information about pending corporate deals and earnings announcements from an array of tipsters, including a Goldman Sachs board member, a senior partner at the consulting firm McKinsey & Co. and an insider at the Moody’s credit rating agency.

The government said Rajaratnam wired money to offshore accounts in phony names to pay for inside information, told others to use prepaid cellphones, lied under oath to the Securities and Exchange Commission when called in for questioning, and created false e-mails as cover stories to disguise the basis for his trades.

The sentence the government sought “would ensure Mr. Rajaratnam’s death in prison—a fate ordinarily reserved only for offenders who have caused the most grave, irreversible, and demonstrable harm to others,” Rajaratnam’s lawyers said in a document filed with the court before he was sentenced.

“Mr. Rajaratnam simply is not in that category, and does not deserve a sentence that separates him from his family forever,” they added. Rajaratnam “suffers from a constellation of serious and degenerative illnesses which require intensive ongoing medical attention and which even under the best of circumstances will almost certainly shorten his life considerably,” they said.

The defense also argued that Rajaratnam deserved leniency based on his history of supporting charitable causes.

In determining the sentence, Holwell cited Rajaratnam’s need for a kidney transplant and his advanced diabetes, the AP reported. And he credited Rajaratnam’s charity work, which he called “the defendant’s responsiveness to and care for the less privileged.”

Asked if he wished to speak, Rajaratnam said only, “No thank you,” according to AP.

Rajaratnam will join a list of high-profile, white-collar financial figures sent to prison, including former Enron executive Jeffrey Skilling, former WorldCom executive Bernard Ebbers and Ponzi scheme mastermind Madoff.

The insider trading case was the most prominent of its kind since Ivan Boesky was convicted a generation ago.

Sentences for insider trading tend to be significantly lighter than the punishments meted out in major accounting frauds, said Michael Perino, a professor at St. John’s University School of Law. That might be because the economic impact of insider trading is more diffuse and impersonal than the fallout from accounting frauds such as Enron’s, in which employees lost jobs and particular investors lost huge sums of money, Perino said.

Enron’s Skilling was sentenced to 24 years, and WorldCom’s Ebbers was sentenced to 25 years.

Rajaratnam will appeal his conviction, Kathryn Holmes Johnson, a spokeswoman for his legal team, said.