Does Rajaratnam deserve 11 years for a 'victimless crime?'

“His crimes and the scope of his crimes reflect a virus in our business culture that needs to be eradicated,” said US District Judge Richard Holwell before sentencing Galleon founder Raj Rajaratnam to 11 years in prison and a fine of $10 million for insider trading.

Two years ago, Bernie Madoff got similar stinging rebukes from Judge Denny Chen for causing investors losses of a massive $18 billion (billion, not million) through a Ponzi scheme involving his firm Bernard L. Madoff Investment Securities. Among other things, Chin used words and phrases like “extraordinary evil” and “unprecedented” while giving Madoff a 150-year sentence, says the The Wall Street Journal.

While harsh words have always been par for the course in American judgments, the high sentencing for white collar crimes is a relatively new thing in the context of growing public suspicion about Wall Street and the Greed Brigade after the crash of Lehman Brothers and the collapse of the American Dream.

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[caption id=“attachment_108318” align=“alignleft” width=“380” caption=“What is significant about the Rajaratnam sentence is that he’s got 11 years for insider trading - which is almost a “victimless crime.” Reuters”]  [/caption]

Earlier, white collar criminals got more bark than bite from the US justice system.

Take the case of Mike Milken, junk bond king of the 1980s, who was sentenced to 10 years in prison in 1990. At his sentencing, Judge Kimba Wood said: “You were willing to commit only crimes that were unlikely to be detected…. When a man of your power in the financial world… repeatedly conspires to violate, and violates, securities and tax business in order to achieve more power and wealth for himself… a significant prison term is required.”

But he was let off within 22 months because he had prostate cancer. But he is still around, with his cancer in remission.

Nick Leeson, the rogue trader who single-handedly brought down Barings Bank, got six-and-a-half years for his crime in Singapore. He was let off in three since he, too, was diagnosed with cancer. He is still around, having defeated cancer.

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Both Leeson and Milken are today wined and dined as celebs. The former is a regular in the after-dinner and keynote speaking circuit, while the latter is reckoned to be an ace philanthropist with Fortune magazine eulogising him as “ The Man who changed medicine” in a cover story, for his contributions to fighting incurable diseases though his foundation.

If Rajaratnam has the same luck as Milken and Leeson, and given his medical condition of advanced diabetes and a kidney on the verge of “imminent failure”, he should spend less than his 11 years as Uncle Sam’s guest. He could, of course, receive a lesser sentence on appeal anyway.

What is significant about the Rajaratnam sentence is that he’s got 11 years for insider trading - which is almost a “victimless crime.”

Insider trading is broadly defined as a crime in which a person who obtains inside information about a company’s performance or a price-sensitive development uses it to make money in the stock market. It is considered a crime because while the insider has an advantage on the information, the market does not know the same and is, therefore, handicapped vis–vis the insider.

Insider trading cases are notoriously hard to crack, because prosecutors have to not only prove that you had inside information, but that you used it to benefit yourself or passed it on to someone who used it. Worldwide, barely one in 100 insider traders gets caught in the act. Only the very careless, or the very unlucky, get caught. Rajaratnam was probably a bit of both.

However, the moral case for treating insider trading as a crime is disputed by many free marketers. Reason: the insider’s counter-party in trading is not buying or selling shares unwillingly. He is only operating on weaker information. Thus, insider trading is not a crime like cheating or defrauding someone else.

Some free-marketeers go so far as to say that insider trading should, in fact, be encouraged or else the market would not know something was in the air. The late Milton Friedman, an Economics Nobel winner, said in 2003: “You want more insider dealing, not less. You want to give people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that.”

Knowledge@Wharton, an online journal of the Wharton School of Business in Pennsylvania, also quotes an opinion piece in The Wall Street Journal: “Far from being so injurious to the economy that its practice must be criminalised, insiders buying and selling stocks based on their knowledge play a critical role in keeping asset prices honest - in keeping prices from lying to the public about corporate realities.”

But the consensus is clearly moving against this line of thought, especially in the context of Wall Street’s egregious behaviour in recent years. Quoting Wharton finance professor Jeremy Siegel, K@W says: “I think insider trading is not a good thing. It makes it more risky to buy securities. When someone is offering to buy or sell, it might be that he or she has some inside information and you are going to get duped. So you cannot trust that you are going to get a fair price.” Put another way, “insider trading means other investors pay more than they should when they buy and get less than they should when they sell.”

Perhaps, the middle ground is best. Treat it like a crime where financial gain is penalised by reparations. Going to jail for a “victimless crime” seems a bit much. The best way to deal with Rajaratnam’s crime is to ask him to disgorge his profits and pay a stiff penalty for it.