As a lawyer, Jed Rakoff once persuaded a judge to give probation to a client convicted at an insider-trading trial alongside former Wall Street Journal reporter R. Foster Winans. Now a federal judge himself, Rakoff must weigh Rajat Gupta’s similar request to stay out of prison.
Gupta, a former Goldman Sachs Group Inc. director, will come before Rakoff in Manhattan federal court on Oct. 24 to be sentenced for leaking stock tips to Galleon Group LLC co-founder Raj Rajaratnam. Prosecutors say Gupta, convicted by a jury in June, deserves as long as 10 years in prison. Gupta seeks probation.
Gary Naftalis, a lawyer for Gupta, argued his client’s crime was an “aberrational” event in a “lifetime of good works” that merited a punishment for a man who has suffered an extraordinary fall from grace. He asked Rakoff to impose a term of community service, suggesting Gupta work with troubled youth in New York or with the poor in Rwanda.
“Good works help, but on their own they are rarely a ‘Get out of jail free card,’” said Gordon Mehler, a former federal prosecutor who’s now in private practice in New York. “So, it seems as if probation, even in Rwanda, is unlikely.”
Gupta, 63, is the most prominent of 70 people convicted since a nationwide insider-trading crackdown by U.S. prosecutors began four years ago. Gupta also served as managing partner of McKinsey & Co. from 1994 to 2003 and on the board of Procter & Gamble Co. from 2007 to March 2011, when he also resigned from the boards of Goldman Sachs, AMR Corp. and two other companies.
After a four-week trial in June, jurors found Gupta guilty of tipping Rajaratnam about dealings at New York-based Goldman Sachs, including a $5 billion investment by Warren Buffett’s Berkshire Hathaway Inc. Rajaratnam, 55, is serving 11 years in prison for trading on tips from Gupta and others.
In his 17 years as a judge, Rakoff has sentenced at least nine defendants for insider trading, including seven who pleaded guilty and two whom he jailed after they were found guilty by juries. Rakoff has a track record of imposing a sentence that is half what the government recommends.
“If there is any judge who’s sensitive to the draconian impact of the sentencing guidelines with respect to white-collar offenders, it’s Judge Rakoff,” said J. Bruce Maffeo, a former federal prosecutor now in private practice. “That being said, he’s equally sensitive to the need to fashion a sentence that takes into account both the defendant’s personal background and the need to deter others in the financial world, where this kind of activity appears to be more prevalent than previously assumed.”
Rakoff, a former federal prosecutor in New York who headed the office’s securities-fraud unit, was a white-collar criminal-defense lawyer before taking the bench.
As a defense lawyer, Rakoff won leniency for a client convicted of insider trading who was also facing prison.
Rakofff’s client, David Carpenter, went on trial in 1985 with his lover, journalist R. Foster Winans, and broker Kenneth Felis. Prosecutors said Winans leaked tips to Felis about forthcoming market-moving articles in his “Heard on the Street” column, Felis traded on the news and Carpenter allowed Winans to place trades through his account. All were convicted. Carpenter died in 1991.
At the sentencing, Rakoff compared Carpenter’s relationship with Winans to that of wife-and-husband and said Carpenter merely acquiesced to Winans’ trades, according to Winans’s lawyer, Don Buchwald. Carpenter got probation while Winans was given an 18-month prison term.
“He was following Foster,” Buchwald said in a phone interview last week. “Carpenter was a very sympathetic figure.”
This week, Gupta will be seeking sympathy of a different sort from Rakoff. Gupta’s lawyer, Naftalis, said in a court filing that Gupta deserves probation because his crime was an aberration in a life “defined by helping others.”
Naftalis cited Gupta’s work as chairman of the Global Fund, an initiative to fight AIDS, tuberculosis and malaria, as well as his work with the United Nations to improve world health. Naftalis declined to comment on a comparison of the Gupta and Carpenter cases. The defense submitted more than 400 letters to the judge describing Gupta’s accomplishments.
In their pre-sentencing court filings, prosecutors gave a different portrait of Gupta and asked Rakoff to consider the personal relationship between Gupta and Rajaratnam.
‘Very Close Friend’
In asking for a term of 97 months to 121 months, which they say are called for by U.S. sentencing guidelines, prosecutors say Gupta violated confidences and breached his duty as a senior corporate official by leaking news to his “very close friend” and business partner.
“Gupta’s interests often were aligned with those of Rajaratnam and Galleon such that Gupta stood to benefit if Galleon was successful,” prosecutors wrote in a filing, citing Gupta’s investment in Galleon and their partnership in another investment fund.
In court papers filed today, Gupta’s lawyers also argued against a request by the U.S. to order Gupta to pay restitution to his victims, including one by Goldman Sachs seeking $6.7 million in legal fees and a percentage of the compensation it paid him as a director. Naftalis argued the request was “flawed” and that there was “no basis for the request.”
“It ignores the fact that Mr. Gupta received no profits,” Naftalis said, noting that when Rajaratnam was sentenced in Oct. 2011 and ordered to forfeit $53.8 million, Goldman Sachs never sought restitution from the fund manager, who traded on information Gupta passed him in September and October 2008.
“Goldman trades by Galleon formed a significant aspect of the conspiracy charges against Rajaratnam,” Naftalis said. “Goldman made no claim to restitution at the time of Rajaratnam’s sentencing. And the government’s submission here provides scant explanation and no documentary support for Goldman’s claim.”
U.S. Attorney Preet Bharara in a filing today argued that the court should stand by a sentencing guideline of eight years to 10 years.
The U.S. doesn’t dispute that “in most respects” Gupta, as described in support letters sent to the court, has led an “exemplary and law-abiding life,” according to the filing. Those facts must be balanced against Gupta’s conviction for an offense that threatened the “integrity of the financial markets in a serious way,” Bharara argued.
Richard Holwell, the former federal judge who presided over Rajaratnam’s trial and sentenced the fund manager, said judges consider “general deterrence,” or whether the sentence they impose will deter others from committing similar crimes.
“The nature and circumstances of the crime weigh in the government’s favor, because insider trading is a serious white-collar crime that undermines the integrity of the markets” said Holwell, who is now in private practice.
“The government will lean on general deterrence because insider trading has to be eradicated and one way to do that is by taking highly visible cases and making examples of them,” Holwell said. “That will weigh heavily on Rakoff.”
Other criminal defense lawyers said Gupta’s fall from grace may work in his favor. Kevin O’Brien, a former federal prosecutor in New York, said the judge must weigh Gupta’s achievements against his crimes.
“There is human drama there,” O’Brien said. “You can make the argument that for a guy like this who was on top of the world to have fallen so low and to have been so humiliated and exposed by a lengthy public trial, that is punishment enough.”
“What is smart about the Rwanda option is that it makes vivid Gupta’s commitment to public service and brings out with some clarity his history of good deeds,” he said. “It’s a creative approach.”
Federal sentencing guidelines are advisory. Rakoff’s history has been one of imposing sentences well below the recommended federal guidelines, which he has called a “mirage of something that can be obtained with arithmetic certainty.”
Last year, he sentenced James Fleishman, a former executive at expert-networking firm Primary Global Research LLC, to 2 1/2 years in prison for passing tips to fund managers while the guidelines called for more than seven years. He also ordered Primary Global consultant Winifred Jiau to serve 48 months for selling information. Her guidelines suggested a term of 78 months to 97 months in prison.
Still, Rakoff has rarely been silent about the contempt he has for insider traders, often expressing his sentiments in open court. In Fleishman’s case, he said insider prosecutions over “the last 30 or 40 years” have not “done enough to deter this serious and sophisticated crime.”
With Jiau, whose scheme ran for two years, he said the leaks undermined “the integrity of the financial markets” and demanded a “meaningful sentence.”
Maffeo said he believes Rakoff will impose some term of incarceration upon Gupta.
Rakoff has demanded prison in cases in which, unlike Gupta, the defendants have admitted trafficking in illicit information. He sentenced ex-SAC Capital Advisors LP manager Donald Longueuil to 30 months instead of the 46 months to 57 months urged by the guidelines. He ordered a former Taiwan Semiconductor Manufacturing Co. manager to spend 18 months behind bars.
“Why is it that defendants always remember how much they love their families after they’ve committed the crimes that place that relationship in jeopardy?” Rakoff said at the sentencing of former Galleon trader Adam Smith, who won probation largely because he cooperated with prosecutors and testified against Rajaratnam.
Rakoff imposed an 18-month prison term on Manosha Karunatilaka, a former Taiwan Semiconductor Manufacturing Co. manager who pleaded guilty to passing nonpublic information about his company’s orders to fund managers as part of an insider-trading scheme. Karunatilaka cooperated with the U.S. and accepted responsibility for his crimes.
As Karunatilaka’s infant child cried in the courtroom, Rakoff rejected a bid by defense lawyer Brad Bailey to impose a term of six months’ in prison and six months of home confinement.
Gupta, after two days of deliberations by a jury, was found guilty of three counts of securities fraud and one count of conspiracy. The tips came in September and October 2008 and concerned Buffett’s $5 billion investment in Goldman Sachs and the bank’s losses in the fourth quarter of 2008.
Jurors acquitted Gupta of charges that he leaked information that Cincinnati-based P&G’s organic sales growth would fall below estimates and that he tipped Rajaratnam about Goldman Sachs’s earnings in the first quarter of 2007.
In his filing, Naftalis argued that Gupta deserves leniency because his crimes were limited to a two-month period in 2008.
Peter Henning, a professor at Wayne State University Law School in Detroit, said Rakoff will focus on the nature of the crime and Gupta’s background. Henning predicted that the former Goldman Sachs director will get a prison term of two years to three years.
“That’s not a deleterious prison term, but it is prison and it doesn’t mean he will get a free pass,” Henning said in a phone interview. “It has to be a term to get everyone’s attention, and by everyone, I mean Wall Street.”
The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).