Hedge fund founder gets 11-year term

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Raj Rajaratnam pleaded for leniency, but in an era of mounting public anger against Wall Street excess and seemingly unrepentant self-dealing in corporate America, the disgraced billionaire found no sympathizers in the U.S. justice system.

The fallen hedge fund tycoon who exploited the stock market by using privileged information to buy and sell shares in some of America's biggest companies, from Goldman Sachs to Google, has been handed the harshest penalty yet for insider trading by a U.S. judge.

But the sentence handed down Thursday in Manhattan – 11 years in prison, a $10-million fine and the forfeiture of nearly $54-million – is more significant than the numbers suggest. With public protests against Wall Street gaining momentum in several U.S. cities, and spreading north to Toronto next week, Mr. Rajaratnam is symbolic of a new pursuit of white-collar greed by the courts, after decades of treating such offences as a far lesser evil than violent crimes.

Judge Richard Holwell slapped the 54-year-old native of Sri Lanka with a sentence similar to those doled out for robbery. The language used during the sentencing resembled that of the placards carried by Wall Street protesters outside.

"His crimes reflect a virus in our business culture that needs to be eradicated," the judge said of Mr. Rajaratnam, who ran the high-flying New York hedge fund Galleon Group and carried a personal wealth of $1.5-billion before investigators closed in on his dealings in 2008. "Insider trading is an assault on the free markets," the judge said.

Mr. Rajaratnam has become the face of modern insider trading, along with more than a dozen Galleon executives who have been sentenced to shorter prison sentences. Dubbed a "serial inside trader," federal investigators tapped his cell phone for most of 2008, recording brazen conversations where he openly exchanged sensitive and confidential information with a network of insiders – including a former director at Goldman Sachs – and used the money to trade stocks. Prosecutors contend the damage was severe: His ability to profit from trades, and avoid losses by selling at the right time, added up to more than $70-million.

Among such insider tips was the advance knowledge Mr. Rajaratnam gained in September, 2008, that Warren Buffet's Berkshire Hathaway was about to buy a $5-billion stake in Goldman Sachs, allowing him to load up on shares before the stock price surged on the announcement.

But even with the crackdown against Galleon executives playing out in the courts, it is unlikely that this new brand of harsh sentences will satisfy critics of Wall Street and the justice system's handling of white-collar crime. Indeed, prosecutors sought a much harsher sentence for Mr. Rajaratnam, asking the judge for a penalty of between 19½ years and 24½ years.

John Coffee, a securities-law expert and a professor at Columbia University's law school, said he was surprised that the sentence wasn't more punitive if the courts truly did want to make a statement. Mr. Rajaratnam's lawyers argued for a lighter sentence due to his ongoing health problems, including kidney disease.

"I would not describe 11 years as lenient," Mr. Coffee said. "But I doubt the prosecutors are happy with this sentence. It does not, quote, 'send the message' they wanted."

However, Douglas Burns, a former federal prosecutor in New York who now defends clients accused of white-collar crimes, said the judge appeared to be making an example of Mr. Rajaratnam. "Eleven years is a significant sentence," Mr. Burns said. "It is designed to send a message of deterrence to those who would engage in insider trading, and I think that's what Judge Holwell did."

A higher proportion of those found guilty of insider trading in New York federal courts are now being sentenced to significant jail time. Over the past two years, defendants received a median sentence of 2½ years, which is longer than the median sentence of 11½ months such cases got from 1993 to 1999, according to an analysis of cases by the Wall Street Journal.

Mr. Rajaratnam's 11-year sentence is slightly longer than the term handed to Zvi Goffer, a former trader at Galleon, who was sentenced to 10 years in September for insider trading. Those penalties resemble decisions handed down for crimes such as robbery, where the median sentence in the United States this summer was just over five years, according to the U.S. Sentencing Commission.

"The trend in the last decade has been toward increased sentences for this type of white-collar crime," Mr. Burns said. "And today's proceedings are reflective of that trend."