The fallen hedge fund billionaire Raj Rajaratnam received the longest prison sentence ever for insider trading on Thursday, capping an aggressive government campaign that has ensnared dozens and may help deter the illegal use of confidential information on Wall Street.
Judge Richard J. Holwell of Federal District Court in Manhattan sentenced Mr. Rajaratnam, 54, the former head of the Galleon Group hedge fund, to 11 years in prison. A jury convicted Mr. Rajaratnam of securities fraud and conspiracy in May after a two-month trial.
“Insider trading is an assault on the free markets,” said Judge Holwell, who also imposed a $10 million fine and ordered Mr. Rajaratnam to forfeit $53.8 million in ill-gotten profits. “His crimes reflect a virus in our business culture that needs to be eradicated.”
The sentence was a watershed moment in a two-year push by federal prosecutors. Over that period, Preet S. Bharara, the United States attorney in Manhattan, has brought charges against 54 people with insider trading crimes. Of those, 50 have been either pleaded guilty or have been convicted at trial. Three others’ situations are pending, and the fourth is a fugitive.
Yet the crackdown on insider trading — a crime whose victims are not always apparent — has come at a time when many Americans have questioned why authorities have not pursued charges against bank executives over their role in the financial crisis, which still weighs on the economy.
With Mr. Rajaratnam, the government was willing to use novel ideas and hardball tactics to bring a case. For the first time in an insider trading investigation, the government used wiretaps to record traders’ telephone conversations. Federal agents pressured traders to wear hidden microphones and record their calls to build their cases.
It remains to be seen whether the use of wiretaps and the stiff penalties will have a chilling effect on insider trading, but most legal experts say they will.
“No matter the crime, if the rewards are great enough, people will ignore the risk of getting caught,” said Jonathan B. New, a criminal defense lawyer and former federal prosecutor. “For people who think that insider trading isn’t a serious crime or that the rewards outweigh the risks, these heavy sentences do send a powerful message to the contrary.”
Still, at 11 years, the sentence lacks the symbolic heft of the 19 to 24 years prosecutors sought. Mr. Rajaratnam deserved an outsize penalty, said the federal prosecutor Reed Brodsky at Thursday’s hearing, because his crimes were “brazen, pervasive and egregious,” and, “There is no one who is Mr. Rajaratnam’s equal in terms of the breadth and scope of his insider trading crimes.”
Prosecutors accused Mr. Rajaratnam of using a corrupt network of well-placed tipsters — including former executives of Intel, I.B.M. and the consulting firm McKinsey & Company — to illicitly gain about $72 million through his stock trading.
Mr. Rajaratnam stood stone-faced as Judge Holwell read his sentence in a packed courtroom. Mr. Rajaratnam, a Sri Lankan native, who has not spoken publicly since his arrest in October 2009 and declined to testify at his trial, did not speak at the sentencing.
In imposing his sentence, Judge Holwell cited a number of mitigating factors. He said Mr. Rajaratnam’s “good works figure into the equation,” citing his financial help for victims of the tsunami in Sri Lanka and the Sept. 11 attacks.
The judge also disclosed that Mr. Rajaratnam had advanced diabetes that was leading to kidney failure, and said prison “is a more intense experience for people with serious health conditions.”
Nevertheless, Mr. Rajaratnam’s sentence continues a trend of ever-stiffer penalties against white-collar criminals. Legal experts say the increased prison terms are in part a result of federal sentencing guidelines passed in 1987 that link the length of a sentence to the dollar amount involved in the fraud. Historically, judges showed leniency when penalizing corporate criminals because they were not seen as a threat to society and perhaps because they empathized with people who often came from similar backgrounds as themselves. But gone, for the most part, are the days of slap-on-the-wrist sentences and “country club” prisons where white-collar defendants served short stints in relatively comfortable quarters.
Corporate wrongdoers have received record-length sentences in recent years. Bernard L. Madoff is serving 150 years for cheating investors in an epic Ponzi scheme. Lee B. Farkas, a former mortgage company executive, received 30 years for his role in a billion-dollar bank fraud scheme.
On the insider trading front, judges’ penalties have also been severe. Zvi Goffer, a former trader at Galleon, received a 10-year prison term, matching the longest previous sentence for insider trading. The average sentence of the 13 other defendants connected to Mr. Rajaratnam’s case has been about three years.
Legal experts say that because prison terms across all federal crimes have substantially increased over the last two decades, it stands to reason that the length of sentences for executives on Wall Street and in corporate America would also grow.
“Often the question is raised, ‘Why shouldn’t crime in the suites be punished as severely as crimes on the streets?’ ” said Douglas A. Berman, a law professor at Ohio State University. “While that sounds like a sound bite, it’s an important question.”
It is a question that played a crucial role in the debate over the appropriate prison term for Mr. Rajaratnam.
John Dowd, Mr. Rajaratnam’s lawyer, asked the judge to impose a sentence closer to six to eight years, noting that a stiffer penalty for Mr. Rajaratnam would be on a par with average sentences for violent crimes like kidnapping and sexual abuse.
Advocates of more lenient insider trading sentences also say the crime does not have any real identifiable victims, while other white-collar crimes like Ponzi schemes or corporate accounting frauds destroy lives and livelihoods.
When federal agents arrested Mr. Rajaratnam almost exactly two years ago, his case brought to mind the insider trading scandals of the 1980s. Rudolph W. Giuliani, then the top federal prosecutor in Manhattan, brought charges against Ivan Boesky and Michael R. Milken, two of the leading financiers of that era.
Mr. Rajaratnam represented a new breed of Wall Street power player: the hedge fund tycoon. Over the last decade, these money managers became among the most powerful players in global finance. As their influence and wealth grew — in 2009, Mr. Rajaratnam had a net worth of $1.5 billion, according to Forbes magazine — they attracted attention from regulators.
The government placed Mr. Rajaratnam at the center of what it billed as the largest hedge fund insider trading case ever brought. Prosecutors played at trial scores of phone conversations in which Mr. Rajaratnam exchanged illegal stock tips about companies like Goldman Sachs and Google with corporate insiders and fellow traders.
Those recorded calls are expected to be the focus of Mr. Rajaratnam’s appeal, which will argue that the judge’s decision to admit them as evidence was unauthorized by Congress and unconstitutional. Legal experts say the odds of a reversal are low because appeals courts show great deference to the trial court judge on this issue.
Mr. Rajaratnam must report within 45 days to the Bureau of Prisons, which will assign him to a facility. The judge said he would recommend that Mr. Rajaratnam serve his time at the federal medical center in Butner, N.C., part of the same complex where Mr. Madoff is incarcerated.
Despite the Justice Department’s focus, insider trading has been something of a sideshow to the larger problems related to the global financial crisis. Insider trading at hedge funds — and the notion that the stock market is a rigged game — does not rate on the list of grievances from the anti-Wall Street protests spreading across the country.
“Unless people can identify lost money as a result of insider trading, or have had their savings stolen by Madoff, they don’t view their own economic difficulties as being caused by a few bad apples,” said Mr. Berman, the Ohio State law professor. “They see the problems with our economy and financial markets as far more systemic than that.”
William Alden contributed reporting.
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