A two-year prison sentence for insider trading at the height of the 2008 economic crisis, by a man who was once one of the nation's most respected business executives, is a fifth of the 10 years requested by the government and well below sentencing guidelines. Now, some experts are questioning whether it's a fair punishment.
Judge Jed Rakoff described the sentence and $5 million fine given to former Goldman Sachs and Procter & Gamble Co. board member Rajat Gupta, 63, on Wednesday as sufficient to deter others and properly punish the Westport, Conn., resident.
"At the same time, no one really knows how much jail time is necessary to materially deter insider trading; but common sense suggests that most business executives fear even a modest prison term to a degree that more hardened types might not. Thus, a relatively modest prison term should be 'sufficient, but not more than necessary,' for this purpose," Rakoff said.
Some legal observers did not agree.
Chicago attorney Andrew Stoltmann said the sentence should have been closer to the 10 years prosecutors had recommended because Gupta's crimes were more serious than those committed by Raj Rajaratnam, the billionaire hedge fund founder he tipped off. Rajaratnam is serving 11 years in prison.
"Gupta intentionally betrayed his duties to Goldman Sachs as a director of the company, refused to take responsibility for his actions and put the government through a long and exhaustive trial costing taxpayers millions," Stoltmann said. "Judge Rakoff should have thrown the proverbial book at Gupta and sentenced him to the higher range of the 97 to 121 months prosecutors were requesting."
Thomas Gorman, a former senior counsel in the division of enforcement at the Securities and Exchange Commission, said the sentence was "not harsh" when compared to others in the case who received sentences in the range of three to four years.
"At the same time Mr. Gupta did not trade and did not make money. Rather his motive was friendship. Here the fall from grace for him will be much harder than for most given his stature in the community. That may well be the worst punishment," Gorman said.
Rakoff criticized sentencing guidelines that he said called for Gupta to serve at least 6½ years behind bars.
Citing information he received under seal, Rakoff said Gupta's crimes may have occurred because Gupta may have "longed to escape the straightjacket of overwhelming responsibility, and had begun to loosen his self-restraint in ways that clouded his judgment."
The Harvard-educated businessman long respected on Wall Street was one of the biggest catches yet for the federal government in its five-year crackdown on insider trading that has so far resulted in 69 convictions.
Gupta was ordered to report to prison on Jan. 8.
Reading from a statement, he said: "The last 18 months have been the most challenging period of my life since I lost my parents as a teenager.
"I regret terribly the impact of this matter on my family, my friends and the institutions that are dear to me. I've lost my reputation I built for a lifetime. The verdict was devastating."
Prosecutors said Gupta hurried to telephone Rajaratnam with stock tips sometimes only minutes after getting them from board conference calls, helping Rajaratnam make more than $11 million in illegal profits for him and his investors.
The narrower insider trading case against Rajaratnam and his co-conspirators resulted in 26 convictions and was described by U.S. Attorney Preet Bharara as the biggest insider trading case in history, successful in part because of unprecedented use of wiretaps more familiar to juries at mob and drug trials.
Prosecutors say Rajaratnam earned up to $75 million illegally through his trades while Gupta's attorneys point out that their client earned no profits.
At trial, Gupta was convicted of three counts of securities fraud and one count of conspiracy, insider trading charges that prosecutors said should result in a prison sentence of up to 10 years in prison.
Rejecting defense arguments that a community service sentence would be sufficient, Rakoff said a prison sentence was necessary to send a message to insider traders that "when you get caught, you will go to jail."
"While no defendant should be made a martyr to public passion, meaningful punishment is still necessary to reaffirm society's deep-seated need to see justice triumphant," the judge said. "No sentence of probation, or anything close to it, could serve this purpose."
Defense attorney Gary Naftalis promised to appeal, saying his client had suffered a fall "of Greek tragedy proportions."
Prosecutors accused Gupta, a former chief of the global consulting firm McKinsey & Co. and a onetime director of the huge consumer products company Procter & Gamble, of "above-the-law arrogance" in feeding Rajaratnam inside tips between March 2007 and January 2009.
Goldman Sachs chairman Lloyd Blankfein testified at trial that Gupta appeared to have violated the investment bank's confidentiality policies.
Naftalis told the judge that Gupta had "one of the best reputations on the planet. His loss of reputation is severely strong punishment."
He urged Gupta, who was born in Kolkata, India, be ordered in lieu of prison to work with the Rwandan government in rural areas to fight HIV, malaria and extreme poverty or focus on developing new initiatives in India that would address accelerating migration to India's cities. More than 400 letters written to the judge on Gupta's behalf included documents signed by Microsoft co-founder Bill Gates and former United Nations Secretary-General Kofi Annan.
Rakoff said he could not spare Gupta from prison and only order him to perform community service. "It's not a punishment. It's what he finds satisfaction doing," the judge said.
At Gupta's trial, which began in May, the government highlighted a Sept. 23, 2008, phone call it said was made from Gupta to Rajaratnam only minutes after Gupta had learned during a confidential conference call about Warren Buffett's planned investment through Berkshire Hathaway of $5 billion in Goldman.
Moments after the phone call ended at 3:55 p.m., Rajaratnam purchased $40 million in Goldman stock — an 11th hour trade that ended up making him nearly $1 million — at the height of the financial crisis that had engulfed the country.
The judge at sentencing called that phone call "the functional equivalent of stabbing Goldman in the back."
In his attack on federal sentencing guidelines that are meant to be advisory, Rakoff said "mechanical adding-up of a small set of numbers artificially assigned to a few arbitrarily-selected variables wars with common sense."
He added: "Whereas apples and oranges may have but a few salient qualities, human beings in their interactions with society are too complicated to be treated like commodities, and the attempt to do so can only lead to bizarre results."