Rajat Gupta Could Go to Prison for 10 Years for Insider Trading. Is That Fair?

The law, lawyers, and the court.
Oct. 22 2012 5:35 PM

Rajat Gupta Could Go to Prison for 10 Years for Insider Trading

Even though he wasn’t a major player—is that fair?

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Rajat Gupta faces sentencing Wednesday for his securities fraud conviction.

Photo by Emmanuel Dunand/AFP/GettyImages.

On Wednesday Rajat Gupta will appear in Manhattan federal court to be sentenced for passing secrets he learned, while serving on the board of directors of Goldman Sachs, to Raj Rajaratnam, the former chief of hedge fund giant Galleon Group. Rajaratnam himself was convicted in May 2011 of being the center of the biggest insider trading ring in decades. He’s serving 11 years for his crimes, one of the longest sentences ever for insider trading.

Like Rajaratnam, Gupta, the former head of McKinsey & Company, deserves punishment. He was convicted of a type of securities fraud, and fraud is a form of theft. He wrongly used his position of power and influence for personal advancement, corroding Main Street’s trust and confidence in Wall Street. 

Still, Gupta is no Rajaratnam. Gupta tipped inside information about one company to Rajaratnam, while Rajaratnam traded on confidential information collected from many sources. So you’d expect that Gupta would be treated differently when he appears for sentencing. Federal sentencing guidelines, however, suggest a prison term for him that’s similar in length to the 11 years Rajaratnam is serving. And prosecutors want a sentence within those guidelines, just as they want for the hundreds of defendants sentenced in federal courts nationwide every day. Because what Gupta and Rajaratnam did is so different, though, sentencing Gupta to anything like the time Rajaratnam is serving undermines the whole purpose of the sentencing scheme that prosecutors say they want to uphold.

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Lawmakers enacted the federal guidelines in 1987 to try to ensure that defendants who’d committed like crimes received like sentences. They replaced the discretion that judges traditionally enjoyed with a rigid system of mathematical calculations for determining prison term length. Those guidelines were the law of the land until the Supreme Court’s 2005 decision in United States v. Booker, which untethered judges from strict application of the guidelines and returned to them many of the powers that had been wiped away 18 years earlier. Today, the guidelines are advisory, not mandatory.

Nevertheless, the Department of Justice still believes that the guidelines should be faithfully followed and that judges are wrong to deviate from them. In a 2010 speech to the American Bar Association, Lanny Breuer, assistant attorney general for the DoJ’s Criminal Division, cautioned that the department is “especially concerned about increased disparity in white-collar sentencing.” In November 2011 Breuer reiterated to another audience that among the “serious challenges” facing federal sentencing and corrections policy is increased “disparities in federal sentencing” in recent years. In 2012, the DoJ’s annual report to the United States Sentencing Commission, the independent agency that develops and implements the guidelines, expressed concern about “continuing erosion of the guidelines,” and said that “serious reform” of federal sentencing law and policy “is necessary.”

Strict application of the guidelines, though, precludes consideration of a whole host of factors relevant to fixing just and appropriate prison terms, like offenders’ differing personal histories and their distinctive characteristics. That’s especially unfortunate when it means that the person at the top of a scheme and someone at the bottom end up being sentenced in the same way. Rajaratnam and Gupta provide a perfect example. They both were convicted of insider trading. But while Rajaratnam’s business was trading on inside information, Gupta didn’t buy or sell a single share of stock. Likewise, Rajaratnam made millions, while Gupta didn’t make any money. And Rajaratnam was caught on tape scheming with his co-conspirators. No such recordings of Gupta exist. Still, the former McKinsey chief faces up to 10 years in prison, almost as much time as the former Galleon head is serving.

Gupta and Rajaratnam are like the kingpin and corner street dealer who do roughly the same amount of time for drug dealing, as happens to a disturbing degree in narcotics cases (which accounted for almost 30 percent  of the 80,000-plus cases resolved in federal court in 2011). Because drug sentences are fixed by drug type and quantity, not role, defendants in distribution rings face the same potential penalty, whatever their actual position and conduct.  That’s what happened to Jamel Dossie, a small-time, street-level drug dealer’s assistant who was an addict.  In New York in March, he received a five-year mandatory minimum sentence for his role as a go-between in four hand-to-hand crack sales for a total gain to himself of $140.

Luckily for Rajat Gupta, his sentencing judge is Jed S. Rakoff, who has said that where the federal guidelines “provide reasonable guidance,” they “are of considerable help to any judge in fashioning a sentence that is fair, just and reasonable,” but also argued that when the guidelines “have run so amok that they are patently absurd on their face,” courts should rely more on general sentencing principles. Judge Rakoff faced this dilemma in the case of Richard Adelson, who was convicted of participating in a conspiracy to overstate the financial results of Impath Inc. (a laboratory services company) and artificially inflate its stock price. The guidelines recommended life imprisonment for him, even though other people had concocted and operated the scheme for years before Adelson joined it. Judge Rakoff gave him 42 months, describing the life sentence recommended by the guidelines as “patently unreasonable.”

It’s because of Judge Rakoff that Gupta is widely expected to receive a sentence considerably less than what federal guidelines recommend, no matter what the government’s lawyers say. (Gupta’s own counsel have asked for probation.) But the approach of this judge is the exception. The reality of federal sentencing means that it should be closer to the rule.

Harlan Protass is a criminal defense lawyer in New York and an adjunct professor at the Benjamin N. Cardozo School of Law, where he teaches about sentencing.