Prosecutors and defense lawyers were miles apart yesterday as they argued how much financial gain should be attributed to Raj Rajaratnam when Southern District Judge Richard Holwell sends him to prison in the Galleon Group hedge fund scandal.

Special Assistant U.S. Attorney Andrew Z. Michaelson told Judge Holwell that Mr. Rajaratnam was guilty of “serial insider trading” that produced illicit gains of $72 million. That number, if accepted by the judge along with sentencing enhancements for taking a leadership role and obstructing justice, would mean a guidelines sentencing range of 19½ to 24½ years in prison.

But defense lawyer Terence J. Lynam of Akin Gump Strauss Hauer & Feld, one of a half dozen attorneys from Akin Gump who sat with Mr. Rajaratnam, said the government’s number vastly exaggerated the alleged profits made by Mr. Rajaratnam and failed to acknowledge the movements in stock prices that were due to market forces or other events.

See sentencing memoranda filed by the government and the defense.

Mr. Lynam argued that the gains were only $7.4 million. Should Judge Holwell be persuaded of that figure, and decline to impose the enhancements sought by the government, Mr. Rajaratnam’s sentencing range could be as low as 61/2 to eight years and one month when he is sentenced on Oct. 13.

Mr. Rajaratnam was convicted in May of five conspiracies and nine substantive counts of securities fraud for trading on, and passing along, material non-public information on more than a dozen companies (NYLJ, May 11).

While the jury at the two-month trial heard tape-recorded evidence of phone calls between Mr. Rajaratnam and his sources, they did not hear from him in person, as the one-time billionaire declined to take the witness stand.

Yesterday, Mr. Rajaratnam, 54, watched impassively with Akin Gump’s John M. Dowd by his side as Mr. Lynam argued against the government’s math and the leadership-role enhancement, and co-counsel Samidh Guha argued Mr. Rajaratnam should not be penalized further for allegedly obstructing a probe into insider trading by the Securities and Exchange Commission.

Assistant U.S. Attorney Reed M. Brodsky, who prosecuted the case along with Mr. Michaelson and Jonathan M. Streeter, argued for both enhancements as he called Mr. Rajaratnam “by far and away the clear leader in organizing” a series of “interlocking conspiracies,” in which he learned about earnings announcements and corporate transactions and then made millions from the stolen information.

Of all the people who have been prosecuted in connection with Mr. Rajaratnam, and especially those who were part of the five conspiracies proven at trial, Mr. Brodsky said, “Mr. Rajaratnam is uniquely situated as being [the] individual at the top of the pyramid at his hedge fund.”

Addressing the obstruction enhancement, Mr. Brodsky said the defendant “committed perjury” before the SEC and could have been charged with “hundreds,” or even “one thousand” counts of insider trading.

“There has to be a serious price to pay for lying to the SEC,” Mr. Brodsky said.

Mr. Guha called Mr. Brodsky’s statement “hyperbole,” a “personal attack on my client” and “absurd and ridiculous.”

In fact, Mr. Guha said, his client showed nothing like the “unambiguous intent” needed for the obstruction enhancement, and Mr. Rajaratnam had volunteered information to the SEC and cooperated with audits at Galleon.

Market Forces

But the bulk of the argument yesterday focused on the amount of the gain, as Mr. Michaelson told the judge that roughly $30 million of the $72 million in gains were racked up through trading ahead of mergers and acquisitions, and another $30 million trading ahead of earnings announcements for entities such as Google and Goldman Sachs. About $10 million came in the form of trading to avoid losses and the remainder came from trades the defense argues cannot be attributed to Mr. Rajaratnam.

Mr. Michaelson was challenged by Mr. Lynam on whether the government’s method of calculating gains “sweeps up” other factors affecting stock prices.

Mr. Lynam argued that the government should be forced to “back out” the other factors affecting pricing, but Mr. Michaelson said there were no “significant intervening” events that drove the stocks at issue either higher or lower after Mr. Rajaratnam had already placed his bets and the announcement of a merger earnings was made.

The measure of gains, Mr. Michaelson said, was the difference between the price Mr. Rajaratnam paid for the stock and the price he sold it for or the amount of money he saved by dealing ahead of bad news and avoiding losses.

Mr. Lynam said his client should not be penalized by including “loss avoidance” as part of the gains calculations, nor should the amount of money he made for Galleon as a fund, as opposed for himself personally, be included.

Mr. Lynam also took aim at what he said was the prosecution’s extended time period in which to calculate gains. He said the government was counting gains in the stock prices in some cases for several days following the announcement (in one case, 12 days later) when, in fact, it should be calculated from the day of the announcement.

“The window here the government is using is significantly longer” than the case law holds, he said, as courts have increasingly made a point of insisting that sentencing judges “isolate the crime from market forces” also affecting stocks.

That argument appeared to resonate with Judge Holwell, who asked the government to provide him with fresh calculations, including a set that would determine the size of the gain based on the stock price 24 hours after the announcement of corporate news.

Mr. Rajaratnam’s defense team is also seeking a break from Judge Holwell because of their client’s poor health, but they have yet to publicly reveal his condition and documents relating to the issue remain under seal.