Good Men Who Do Bad Things

Judge Rakoff on Rajat Gupta
"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. Having finished his spectacular career at McKinsey in 2007, Gupta, for all his charitable endeavours, may have felt frustrated in not finding new business worlds to conquer After so many years of assuming the role of father to all, 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. Gupta's criminal acts represented the very antithesis of the values he had previously embodied. But the history of this country and the history of the world, I'm afraid, is full of examples of good men who do bad things."
That in a nutshell is why Judge Rakoff sentenced Rajat Gupta to 2 years imprisonment and a $5 million fine. The prosecution had asked for an 8-10 year sentence, the defense proposed probation and community service. So did Rajat Gupta get what he deserved or did he get off too lightly? And what precedent does this set for insider trading cases, given that Mr Gupta did not profit from the trades but he did breach his fiduciary duties as a Goldman Sachs Board member? CNBC-TV18's Menaka Doshi spoke to two veterans in securities regulation & the justice system - Harvey Pitt, Former Chairman of the SEC and Judge Richard Holwell, the Judge who sentenced Raj Rajaratnam to 11 years imprisonment. Doshi: Data shows that sentences have increased in length in the US. Judge Rakoff himself mentions in his order the work of a professor that says that a securities fraud crime that would have fetched a sentence of 30-37 months in 1987 would have in 2003 fetched a sentence of between 151-188 months. That’s a 500 percent increase in the length of the sentence and yet Judge Rakoff seems to have deviated from that trend by sentencing Rajat Gupta to just 24 months/ 2 years. In your assessment is that too little or too much? Judge Rakoff
"In 1987, such a defendant would have faced a Guidelines sentence of 30-37 months; but by 2003, the same defendant would have faced a Guidelines sentence of 151-188 months, a more than 500% increase."
- Judgment quotes research by Professor Stith Holwell: I think it is a lenient sentence that is true as a correct analysis. On the other hand it is a fair sentence in relationship to the sentences that are being handed down by judges and other securities fraud cases. Obviously it is significantly less than the sentence that I imposed on Mr. Raj Rajaratnam but one has to take into consideration that Mr. Raj Rajaratnam was found to be at the center of a conspiracy with dozens of members who were providing information to him. Mr. Gupta, although he has certainly violated the criminal laws, but on the edge, the periphery of that conspiracy and therefore his sentence should have been lower in my judgment than that imposed on Mr. Raj Rajaratnam. WSJ Report
1993-1999 Median Sentence = 11.5 months
2000-2010 Median Sentence = 18 months; 2010-2012 Median Sentence = 2.5 years Rajat Gupta Case
 Prosecution had asked for 8-10 years imprisonment
Judge Rakoff:
"...the Sentencing Guidelines assign just 2 points to Mr. Gupta for his abuse of a position of trust...yet assign him no fewer than 18 points for the resultant but unpredictable monetary gains made by others.." Doshi: You thought it was a lenient sentence and I am trying to understand on what grounds you thought it was a lenient sentence?
 
Holwell: It is a lenient sentence simply by looking at the degree of deviation from the sentencing guidelines. If you assume that the guideline sentence was calculated at 8-10 years or 6-8 in either event, a two year sentence would be approximately one third of the lower end of the guideline sentence. That, if one looked at sentences around the country, would be quite a significant downward departure from the guideline calculation. It is much more normal to see a 25-50 percent discount, if you will, for special circumstances.
 
Pitt: I think the judge did a very fair sentencing in my view. These things are never subject to absolute truth. I think the judge did an excellent job of giving credit to Mr. Gupta's beneficial works but also taking account of the fact that this was really an egregious criminal act on his part. So I think the sentence was fair and appropriate. Over 400 friends of Rajat Gupta, including Bill Gates & Kofi Annan, wrote to Judge Rakoff requesting leniency Judge Rakoff: "... Mr. Gupta has selflessly devoted a huge amount of time and effort to a very wide variety of socially beneficial activities..." Doshi: It is interesting you used those words 'egregious criminal act' because that’s what the judge says in his order. He says, "The heart of Mr. Gupta’s offenses here, it bears repeating, is his egregious breach of trust.” He also says that. “In the eye of the law, Gupta’s crime was to breach his fiduciary duty of confidentiality to Goldman Sachs." So I am a little confused, what is Rajat Gupta being punished for here – insider trading or breach of fiduciary duties because that breach is what occupies much of the order? Judge Rakoff
"The heart of Mr. Gupta’s offenses here, it bears repeating, is his egregious breach of trust." Pitt: Well in fact they are not separate issues. Insider trading requires either the stealing of somebody else’s information or a breach of fiduciary obligations. In this case, Mr. Gupta was a director of Goldman Sachs and yet despite his obligation to keep all of Goldman Sachs information confidential, he disclosed that information or so the court found and once you do that, you breach your fiduciary duty and you facilitate insider trading. So he was convicted of insider trading by virtue of his breach of fiduciary duty.
 
Doshi: Explain that to me in a little more detail, wouldn’t a breach of a fiduciary duty require a separate suit one that is in fact pursued by Goldman Sachs and not a case that broadly focuses on insider trading? Judge Rakoff
"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." Pitt: A breach of fiduciary duty certainly in the case of the corporate Director is comprised of two components- you have a duty of care and a duty of loyalty. Loyalty, means in this case, when you learn a confidence about the corporation you are pledged to serve, you cannot use that information for your own benefit or give it to another person to use for their benefit. In this case Mr. Gupta took confidential information about Goldman Sachs, the pending infusion of a huge amount of money by Warren Buffet and then transmitted that information to Mr. Raj Rajaratnam who then was able to trade and profit on it. So the fact that Mr. Gupta didn’t trade himself is not really all that relevant.
 
Doshi: If Raj Rajaratnam had not traded on the information that he seem to have obtained from Rajat Gupta, would the outcome of Rajat Gupta’s case have been the same? 
 
Holwell: No if there had been no trade there would have been no criminal violation for actual insider trading. Now you have to keep in mind that the US has a criminal conspiracy standard and so if two people enter into an agreement to commit a crime, they are guilty of the crime of conspiracy even though they don’t actually commit the crime of the objective conspiracy. So in theory it would be possible for two people to conspire to get inside information with the intent of trading upon it. And then they would be guilty of that crime even if they never traded.
 
Doshi: We do know that Rajat gupta intends to appeal; we also know that Raj Rajaratnam’s appeal is underway. Will you comment on the validity of wiretaps in this case- you had ruled that they were admissible, that they were not to be suppressed when you were hearing the Raj Rajaratnam case? But we also know that 8 formal federal judges have recently warned that allowing the Raj Rajaratnam ruling to stand would pose a grave threat to the integrity of the warrant process. Now if those wiretaps are not considered to be admissible as decided upon in this appeal what happens- both cases get retried and both defendants have a better chance of success?
 
Holwell: It would be a great blow to the prosecutor if they lose the Raj Rajaratnam appeal on the wiretap issue. I wrote a lengthy opinion at the time denying Mr. Raj Rajaratnam’s motion to suppress the wiretap evidence in his case. I did find that the government had made serious missteps in the information that they had provided to the judge who authorized the wiretaps. But I also concluded that under American criminal law it is not every misstep by a prosecutor that warrants the suppression of evidence. That is the very issue that will now be addressed by the Court of Appeals in New York. It is a very interesting and a very important question.
 
Pitt: This wasn't a case where just a single judge approved the wiretaps. There were a variety of wiretaps approved by a number of judges. In my view, although the question of wiretapping raises a lot of issues, I see no reason that one can't use wiretaps to go after insider trading. Insider trading is a serious crime. It has to be dealt with forcefully.
 
Holwell: If Mr. Raj Rajaratnam is successful, his guilty verdict would be thrown out and the case would be returned to the Federal District Court for retrial. In any retrial the prosecutor would not be able to use any of the wiretaps evidence. It would make it far more difficult to convict Mr. Rajaratnam in that case although until Mr. Rajaratnam's case every prior conviction for insider trading has been built on circumstantial evidence, evidence of the timing of trades, the existence of phone calls; if not their substance. So it's not impossible to gain a conviction without wiretap evidence, its just more difficult. Will they actually retry the case? Usually when a guilty verdict is thrown out and the case is ordered back to retrial the parties negotiate a plea bargain, a settlement. Rajaratnam Case
 FBI had recorded over 2000 calls between Raj and business associates...
Government introduced 45 wiretaps as evidence
Has led to over two dozen prosecutions & convictions Rajaratnam Appeal
Being heard by 3 judge panel
Based on claim that prosecutors mitted key facts when requesting permission to wiretap Pitt: Now, if a court holds that the wiretaps were not properly authorized, then I think that Mr. Gupta's appeal will also have a fair chance of success because the principle element in Mr. Gupta's conviction I believe was the playing of the tape involving Mr. Rajaratnam. It is possible but I think potentially less likely, that a court could say that Mr. Rajaratnam's appeal is successful and he is entitled to a new trial and yet a court might say that Mr. Gupta's conviction still stands. He doesn't benefit from what happens in Mr. Rajaratnam's case- that's because there was a lot of other evidence that showed that immediately after the critical Goldman Sachs board meeting, Mr. Gupta immediately was on the phone and talking to Mr. Rajaratnam. So, a jury could have concluded based solely on those facts that it was beyond a reasonable doubt that the purpose of that conversation was to disclose confidential information. Rajaratnam Appeal
If successful he will be re-tried. May benefit Gupta’s appeal as well