On October 24, US District Judge Jed S Rakoff sentenced Rajat Gupta to two years in prison for passing confidential information on Goldman Sachs to Raj Rajaratnam of the Galleon group of hedge funds. It will be followed by one year of supervised release. He also fined Mr Gupta, formerly of McKinsey, $5 million and ordered him to surrender to the designated prison by 2 p m on January 8, 2013. The 15-page judgment is amazingly lucid, elegant and balanced — undoubtedly one of the most illuminating pieces of legal document one could ever come across. It’s a beautiful mind at work here. Here’s a snapshot.
Imposing a sentence on a fellow human, Judge Rakoff observes in the beginning, is a “formidable responsibility” and it “requires a court to consider, with great care and sensitivity, a large complex of facts and factors”. The sentencing guidelines, he adds, assign all of two points to Mr Gupta “for his abuse of trust – the very heart of the offence –”, but assign him 18 points for the “resultant but unpredictable monetary gains made by others, from which Mr Gupta did not in any direct sense receive one penny”. These numbers, Judge Rakoff observes, appear more the product of “speculation, whim or abstract number-crunching than of any rigorous methodology — thus maximising the risk of injustice”. He elucidates this with another example. The sentencing commission had, in the past, said that one ounce of crack cocaine be considered the equivalent of 100 ounces of powder cocaine, though the two were identical chemically and, subsequent analysis showed, had somewhat similar effects. As crack cocaine was popular amongst African Americans and Hispanics, and powder cocaine amongst Caucasians, the result was to “force upon the courts a gross racial disparity in narcotics sentencing”. Later, the ration was changed from 100/1 to 18/1, but that didn’t help. “In both cases,” Judge Rakoff says, “the numbers were plucked from thin air.”
He then goes on to explain how tolerance for white-collar crimes has diminished in recent years. The defendant of a securities fraud who had caused 250 shareholders to suffer a reduction of $12.5 million in their stock market wealth, Judge Rakoff draws from a case built by Professor Kate Stith of Yale Law School, would have got a term of 30 to 37 months in 1987, according to the sentencing guidelines current then — but 151-208 months by 2003! This huge rise in white-collar sentencing, he observes, “was partly mandated by Congress, reacting in turn to public outcry over such massive frauds as Enron and WorldCom”. No fewer than 20 of the 30 points calculated by the probation department, and endorsed by the government, as reflecting Mr Gupta’s crime and punishment, were “exclusively the product of Mr Rajaratnam’s and his companies’ monetary gain, in which Mr Gupta did not share in any direct sense,” Judge Rakoff says. In other words, while Mr Gupta’s crime was that he breached his fiduciary duty of responsibility to Goldman Sachs, the punishment was assessed solely on the basis of the gain caused to Mr Rajaratnam. “This is a very rough surrogate for the harm to Goldman Sachs.” The victim of the misdemeanour was Goldman Sachs.
Mr Gupta’s first tip-off to Mr Rajaratnam came on September 23, 2008, late on the afternoon that Warren Buffett was set to infuse $5 billion into Goldman Sachs. Before the stock market closed for the day, Mr Rajaratnam’s funds had bought the Goldman Sachs stock in large numbers. When Mr Buffett’s investment was announced the next morning, the share price surged and Galleon made an immediate gain of $1.23 million. (Judge Rakoff calls it the “functional equivalent of stabbing Goldman Sachs in the back”.) The second tip-off came on October 23 when Mr Gupta told Mr Rajaratnam that, contrary to expectations, Goldman Sachs was on its way to report third-quarter losses. Galleon sold Goldman Sachs shares, and, in the process, avoided a loss of $3.8 million till December 16 when Goldman Sachs announced its results. The illegal gain to Galleon from the insider information was $5.03 million, less than a third of the $15.35 million calculated by the government. But this, Judge Rakoff observes, wouldn’t make much difference to the crime and punishment when calculated according to the sentencing guidelines.
Judge Rakoff next takes note of Mr Gupta’s philanthropic work and dismisses the charge that these are shenanigans of a “rich, well-connected defendant endeavouring to derail the court from focusing on his crimes”. The court can say without exaggeration, he notes, “that it has never encountered a defendant whose prior history suggests such extraordinary devotion, not only to humanity writ large, but also to individual human beings in their times of need”. What could have driven Mr Gupta to pass on classified information to Mr Rajaratnam? Once his “spectacular career at McKinsey ended in 2007,” Judge Rakoff says, Mr Gupta “may have felt frustrated in finding new business worlds to conquer”. Mr Rajaratnam, on the other hand, “repeatedly held out prospects of exciting new international business opportunities that Mr Rajaratnam would help fund but that Mr Gupta would lead”. Though Mr Gupta did not benefit immediately from tipping off Mr Rajaratnam, he “viewed it as an avenue to future benefits, opportunities and even excitement,” Judge Rakoff observes.
Insider trading is an easy crime to commit but difficult to detect. Those who commit the transgression, therefore, need to be told that “when you get caught, you go to jail”. The proposal of Mr Gupta’s defendants that he can be counted to devote himself to community service will fail to send this message, Judge Rakoff says. However, business executives “fear even a modest prison term to a degree that more hardened types might not” and “meaningful punishment is still necessary to reaffirm society’s deep-seated need to see justice triumphant”. And then he pronounces the sentence.