Insider Traders Face Longer Sentences as Judges Get Tough
Inside traders have more to fear when they stand before Manhattan federal judges for sentencing.
Since Jan. 1, 2011, the judges have sent the average violator to prison for more than 22 months, according to an analysis of sentencing data by Bloomberg News. That was a 20 percent increase from the average term of 18.4 months during the previous eight years.
The harsher sentences come three years into a federal crackdown on insider trading on Wall Street. Since August 2009, federal prosecutors in Manhattan have charged 71 people with insider trading and won 65 convictions, with six cases still pending. Some of those convicted, including former Goldman Sachs Group Inc. (GS) director Rajat Gupta, are awaiting sentencing.
“There are different insider-trading cases now,” Ellen Podgor, a professor at Stetson University College of Law in Gulfport, Florida, said. “You look at the individuals they’re going after now -- it’s a higher level.”
Judges in Manhattan federal court are also slightly more likely to send offenders to prison. Twenty-one of 36 defendants sentenced for insider trading since the start of 2011 -- or 58 percent -- were jailed. By comparison, 24 of the 43 defendants sentenced from 2003 through 2010, or 56 percent, lost their freedom. Of late, most of those who avoided prison cooperated with the government.
The longer terms for insider trading are consistent with lengthier terms nationally for all forms of fraud. According to U.S. Sentencing Commission statistics, the average sentence in fraud cases in fiscal 2011 rose to 23 months from 14.4 months eight years earlier, a 60 percent increase.
“White-collar sentences all across the U.S. are going up,” Podgor said in a phone interview.
Most of those sentenced in Manhattan since 2011 have been connected to hedge fund Galleon Group LLC or the expert- networking firm Primary Global Research LLC. Other cases involved unrelated tips about Walt Disney Co. (DIS), Human Genome Sciences Inc. (HGSI) and Mariner Energy Inc. The crackdown has been focused in New York because it is home to many of the banks, hedge funds and stock exchanges where the crimes took place.
The longest prison terms were imposed last year on Raj Rajaratnam, 55, the Galleon co-founder who got 11 years, and ex- Galleon trader Zvi Goffer, who was sentenced to 10 years. Gupta, 63, who was convicted by a jury last month, will be sentenced on Oct. 18 for leaking tips to Rajaratnam. Prosecutors in the office of U.S. Attorney Preet Bharara in Manhattan haven’t recommended a prison term for him yet.
Inmates who behave well in prison may see their sentences cut by 14.8 percent, said Ed Ross, a Federal Bureau of Prisons spokesman.
Bloomberg’s analysis is based on decisions by almost 30 judges in 79 cases since 2003. It focuses on cases only in Manhattan, where the crackdown has been centered. Judges elsewhere have imposed lengthy terms, including the 12-year sentence in New Jersey on June 4 for attorney Matthew Kluger, the longest ever in an insider case.
Longer sentences reflect “the breadth of the insider- trading problem,” said Richard Holwell, the judge who sentenced Rajaratnam and is now a partner in the New York firm Holwell Shuster & Goldberg LLP. Such cases today involve “more systemic” wrongdoing, compared to previous ones involving one or two tips, he said.
“There can be an incremental effect” on sentencing “when a particular area becomes a public concern,” Holwell said in a phone interview.
For insider trading, Holwell said many of his former colleagues on the bench believe they need to “send a message” through tougher sentences.
The records confirm what defense attorneys have been telling clients in recent years: It’s risky to take a case to a jury. All of the seven defendants who have gone to trial in Manhattan since Jan. 1, 2011, were found guilty, including Rajaratnam, Goffer and Gupta. The average sentence after trial was 58 months, compared with 22 months during the same time for 18 who pleaded guilty.
Cooperating with the government has kept some of those convicted out of jail. Since the start of 2011, judges have sentenced 12 defendants who admitted their guilt and agreed to provide evidence for prosecutors. Cooperators have secretly recorded their friends and colleagues, interpreted documents and worked in other ways with federal agents.
Eleven of the cooperators avoided prison altogether, according to the data. One got six months.
“It’s important that cooperating witnesses do get lower sentences,” said Christopher Garcia, former chief of the securities fraud unit in the U.S. Attorney’s Office in Manhattan. “The hope of reduced sentences is a powerful tool for prosecutors in persuading and encouraging people to make cases against others.”
Anil Kumar, a former McKinsey & Co. director who testified against both Rajaratnam and Gupta, was sentenced yesterday to probation. U.S. Circuit Judge Denny Chin cited Kumar’s “extraordinary cooperation” and his effort to “make amends for what he did.”
Judges in most insider cases imposed terms less than those recommended by the Sentencing Commission’s guidelines, according to court records.
Rajaratnam, facing from 19 years to 24 1/2 years under the guidelines, got 11 years behind bars. Holwell explained at sentencing that Rajaratnam was sick and had a history of doing charitable works.
In another case, James Fleishman, a Primary Global executive convicted of leaking tips, got 30 months when the guidelines called for a term of 87 to 108 months. U.S. District Judge Jed Rakoff, who has been critical of the sentencing guidelines, handed down the sentence.
James Felman, a lawyer in Tampa, Florida, who serves as the American Bar Association’s liaison to the Sentencing Commission, said many judges are willing to undercut the harsh terms urged by the guidelines in white-collar cases. The U.S. Supreme Court ruled in 2005 that the guidelines were no longer mandatory.
“All guideline sentences have been increasing,” Felman said in a phone interview. Of the recommended white-collar sentences, he said that “even the government is aware they’re frequently too high.”
Still, a conviction for insider trading almost always means prison time for non-cooperating defendants. Of 24 non- cooperators who pleaded guilty or were convicted at a trial during the period measured here, 20 were ordered imprisoned for an average of 33 months. The four spared played minor roles in the schemes, judges said.
Judges take different approaches to sentencing.
Rakoff, who sentenced Fleishman and seven others, routinely imposed less than half the maximum time recommended by the guidelines.
U.S. District Judge Richard Sullivan, who has sentenced 11 inside traders since the start of 2011, hews closer to the recommendations.
He gave Goffer a 120-month term when the guidelines suggested a minimum of 121 months. He ordered former lawyer Jason Goldfarb, who pleaded guilty, to serve 36 months when the guidelines suggested at least 37. Both were convicted of passing tips stolen from the law firm Ropes & Gray LLP.
“The judge you draw in a financial-crime situation is extremely important,” said Barry Slotnick, a defense lawyer at Buchanan Ingersoll & Rooney PC in New York, declining to comment on any specific one. “You have to hope you get a judge who has a sense of leniency or that you are acquitted by a jury.”
Ellen Davis, a spokeswoman for Bharara, declined to comment on sentencing trends. Rakoff and Sullivan also declined to comment.
Under the guidelines, no factor is more important in calculating a suggested sentence than the amount of money involved in white-collar schemes, said Felman. That’s consistent with how New York judges have sentenced defendants.
In May, for example, former Marvell Technology Group Ltd. (MRVL) accountant Stanley Ng was sentenced by Rakoff to probation after his lawyer argued that he made no money by passing a few tips.
On the other hand, Craig Drimal, a trader who worked at Galleon, was sentenced by Sullivan to 5 1/2 years after admitting he traded on tips from Goffer. Drimal, whose sentence was the third-longest in the past 18 months, earned $6.5 million in illicit profits.
The next-longest sentences went to former FrontPoint Partners LLC fund manager Joseph “Chip” Skowron, who got five years for trading on tips from a drug company’s adviser; Winifred Jiau, an ex-Primary Global consultant sentenced to four years after being convicted at trial of leaking news; and Goldfarb and Emanuel Goffer, Zvi’s brother, who got three-year terms.
Lawmakers and the Sentencing Commission, an independent agency of the federal courts, have pushed criminal penalties ever higher for white-collar offenses since the guidelines took effect in 1987, Felman said. Insider trading under the law is a form of securities fraud.
Fortunately for inside traders, it’s sometimes difficult to calculate the amount of money involved in their schemes, especially compared with accounting fraud cases where a company stock drops precipitously, Felman said. He added that it may be difficult in an insider case to calculate the number of victims, another factor that influences the recommended sentence.
“Insider trading is a peculiar type of securities fraud where the loss, or the harm, is a little less tangible,” he said.
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