The order
of the United States District Court, Southern District of New York, sentencing
Rajat Gupta to 2 years’ imprisonment and US$ 5 million fine for insider trading
is one that is carefully crafted and likely to be of significance in sentencing
jurisprudence as far as securities law violations are concerned.
of the United States District Court, Southern District of New York, sentencing
Rajat Gupta to 2 years’ imprisonment and US$ 5 million fine for insider trading
is one that is carefully crafted and likely to be of significance in sentencing
jurisprudence as far as securities law violations are concerned.
The
order, pronounced by Judge Rakoff is detailed and well-considered, given that
the judge preferred to deviate from the standard sentencing guidelines. More
importantly, the case involved a balancing of various considerations and
sensitivities that are siginficant not only to Mr. Gupta specifically, but also
relevant to the overall impact of enforcing laws against insider trading and
other securities laws violations.
order, pronounced by Judge Rakoff is detailed and well-considered, given that
the judge preferred to deviate from the standard sentencing guidelines. More
importantly, the case involved a balancing of various considerations and
sensitivities that are siginficant not only to Mr. Gupta specifically, but also
relevant to the overall impact of enforcing laws against insider trading and
other securities laws violations.
One of
the questions pertained to the appropriateness of sentencing Mr. Gupta when he
did not personally profit from the insider trading. Usually, the amount of
profit or gain to the insider or the loss caused to the counterparties or the
market is a relevant factor for sentencing. In this case, the court therefore
approached Mr. Gupta’s offence from a different standpoint, i.e. the essence of
the act committed rather than its impact. Judge Rakoff observed:
the questions pertained to the appropriateness of sentencing Mr. Gupta when he
did not personally profit from the insider trading. Usually, the amount of
profit or gain to the insider or the loss caused to the counterparties or the
market is a relevant factor for sentencing. In this case, the court therefore
approached Mr. Gupta’s offence from a different standpoint, i.e. the essence of
the act committed rather than its impact. Judge Rakoff observed:
The heart of Mr. Gupta’s offenses here, it bears repeating, is his
egregious breach of trust. … While insider trading may work a huge
unfairness on innocent investors, Congress has never treated it as a fraud on
investors, the Securities Exchange Commission has explicitly opposed any such
legislation, and the Supreme Court has rejected any attempt to extend coverage
of the securities fraud laws on such a theory.
… In the eye of the law, Gupta’s crime was to breach his fiduciary duty
of confidentiality to Goldman Sachs; or to put it another way, Goldman Sachs,
not the marketplace, was the victim of Gupta’s crimes as charged. Yet the Guidelines assess his punishment
almost exclusively on the basis of how much money his accomplice gained by
trading on the information. At best, this is a very rough surrogate for the
harm to Goldman Sachs.
egregious breach of trust. … While insider trading may work a huge
unfairness on innocent investors, Congress has never treated it as a fraud on
investors, the Securities Exchange Commission has explicitly opposed any such
legislation, and the Supreme Court has rejected any attempt to extend coverage
of the securities fraud laws on such a theory.
… In the eye of the law, Gupta’s crime was to breach his fiduciary duty
of confidentiality to Goldman Sachs; or to put it another way, Goldman Sachs,
not the marketplace, was the victim of Gupta’s crimes as charged. Yet the Guidelines assess his punishment
almost exclusively on the basis of how much money his accomplice gained by
trading on the information. At best, this is a very rough surrogate for the
harm to Goldman Sachs.
The other
sensitive consideration pertained to Mr. Gupta’s background, past track-record
and his previous impeccable reputation. The defence relied upon letters from
various luminaries speaking to his conduct. Judge Rakoff was required to
balance this factor against the grevious nature of the insider trading offence
and its impact on the financial markets. Although this was weighed carefully,
it was not sufficient for Mr. Gupta to avoid a jail sentence altogether. The
careful process through which the court came to this conclusion cannot be
expressed any better than in the powerful words of Judge Rakoff, which are
worthy of extracting at some length below:
sensitive consideration pertained to Mr. Gupta’s background, past track-record
and his previous impeccable reputation. The defence relied upon letters from
various luminaries speaking to his conduct. Judge Rakoff was required to
balance this factor against the grevious nature of the insider trading offence
and its impact on the financial markets. Although this was weighed carefully,
it was not sufficient for Mr. Gupta to avoid a jail sentence altogether. The
careful process through which the court came to this conclusion cannot be
expressed any better than in the powerful words of Judge Rakoff, which are
worthy of extracting at some length below:
… The Court can say without exaggeration that it has never encountered
a defendant whose prior history suggests such an extraordinary devotion, not
only to humanity writ large, but also to individual human beings in their times
of need. …
a defendant whose prior history suggests such an extraordinary devotion, not
only to humanity writ large, but also to individual human beings in their times
of need. …
But when one looks at the nature and circumstances of the offense, the
picture darkens considerably. In the Court’s view, the evidence at trial
established, to a virtual certainty, that Mr. Gupta, well knowing his fiduciary
responsibilities to Goldman Sachs, brazenly disclosed material non-public
information to Mr. Rajaratnam at the very time, September and October 2008,
when our financial institutions were in immense distress and most in need of
stability, repose, and trust. …
picture darkens considerably. In the Court’s view, the evidence at trial
established, to a virtual certainty, that Mr. Gupta, well knowing his fiduciary
responsibilities to Goldman Sachs, brazenly disclosed material non-public
information to Mr. Rajaratnam at the very time, September and October 2008,
when our financial institutions were in immense distress and most in need of
stability, repose, and trust. …
…
So how does a court balance these polar extremes? …
…
As to specific deterrence, it seems obvious that, having suffered such
a blow to his reputation, Mr. Gupta is unlikely to repeat his transgressions,
and no further punishment is needed to achieve this result. General deterrence, however, suggests a different
conclusion. As this Court has repeatedly
noted in other cases, insider trading is an easy crime to commit but a difficult
crime to catch. Others similarly
situated to the defendant must therefore be made to understand that when you
get caught, you will go to jail.
Defendant’s proposals to have Mr. Gupta undertake various innovative
forms of community service would, in the Court’s view, totally fail to send
this message. Moreover, if the reports
of Mr. Gupta’s charitable endeavors are at all accurate, he can be counted on
to devote himself to community service when he finishes any prison term,
regardless of any order of the Court.
a blow to his reputation, Mr. Gupta is unlikely to repeat his transgressions,
and no further punishment is needed to achieve this result. General deterrence, however, suggests a different
conclusion. As this Court has repeatedly
noted in other cases, insider trading is an easy crime to commit but a difficult
crime to catch. Others similarly
situated to the defendant must therefore be made to understand that when you
get caught, you will go to jail.
Defendant’s proposals to have Mr. Gupta undertake various innovative
forms of community service would, in the Court’s view, totally fail to send
this message. Moreover, if the reports
of Mr. Gupta’s charitable endeavors are at all accurate, he can be counted on
to devote himself to community service when he finishes any prison term,
regardless of any order of the Court.
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.
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.