Raj Rajaratnam's Historic Insider Trading Sentence

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INTRODUCTION

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.

I. CONSPIRACY AND INSIDER TRADING CHARGES

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.

A. 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. …