Friday, October 26, 2012

Rajat Gupta’s Sentencing Order

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.

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.

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 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.

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:

… 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. …

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. …

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.

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.

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