The two-year prison term Southern District Judge Jed Rakoff ordered for former Goldman Sachs director Rajat Gupta for insider trading was driven by a longstanding hostility to what the judge highlighted as the absurd results of the federal sentencing guidelines.
At liberty to deliver a long sentence in light of Gupta’s use of his privileged position to feed Raj Rajaratnam inside information, Rakoff (See Profile) went the other way, dropping down, and out, of a guidelines range of 78 to 97 months he called irrational given the defendant’s crimes and personal history of charitable works.
Rakoff compared the gain calculation that set that range for white-collar crimes to the one-time 100-1 crack-cocaine to-powdered- cocaine ratio, now 18-1, the effect of which was to “force upon the courts a gross racial disparity in narcotics sentencing” based on “numbers plucked from thin air.”
“Here, as there, the numbers assigned by the Sentencing Commission to various sentencing factors appear to be more the product of speculation, whim, or abstract number-crunching than of any rigorous methodology—thus maximizing the risk of injustice,” he said in a written opinion read from the bench in United States v. Gupta, 11 Cr. 907.
Gupta’s sentence stands in stark contrast to the 11 years Judge Richard Holwell gave to Rajaratnam or the 10 years that Judge Richard Sullivan (See Profile) gave to Zvi Goffer in the insider trading probe and it wasn’t the first time Rakoff has gone low.
Following the decision of the U.S. Supreme Court to render the once-mandatory guidelines advisory in United States v. Booker, 543 U.S. 220 (2005), Rakoff was one of the first out of the gate to employ the wide discretion restored to judges to assign a sentence well below the guidelines range—and be upheld at the circuit level.
In United States v. Adelson, 441 F.Supp. 2d 506 (S.D.N.Y.), Rakoff brushed aside prosecutors’ request for an 85-year sentence to former Impath President Richard Adelson in a $260 million fraud.
Giving Adelson 3 1/2 years, Rakoff decried “the utter travesty of justice that sometimes results from the guidelines’ fetish with abstract arithmetic, as well as the harm that guidelines calculations can visit on human beings if not cabined by common sense.”
It’s not that the judge refuses to deliver a long sentence in a white-collar case.
When it came to disgraced attorney Marc Dreier, who stole hundreds of millions of dollars from hedge funds and other investors, the government asked for 145 years in prison, an echo of the 150 years Judge Denny Chin (See Profile) ordered Bernard Madoff for his massive Ponzi scheme.
Rakoff, who had called Dreier’s fraud one of the “most egregious in history” gave him 20 years, but only after criticizing the government’s request, saying Dreier “is not Mr. Madoff” by any analysis.
In sentencing Gupta on Oct. 24, Rakoff called sending a fellow human being to prison “a formidable responsibility” that requires a court to balance “a large complex of facts and factors.”
“The notion that this complicated analysis, and moral responsibility, can be reduced to the mechanical adding-up of a small set of numbers artificially assigned to a few arbitrarily-selected variables wars with common sense,” he said.
The numbers that bothered the judge in Gupta’s case he said were prime example of the “bizarre results” of this kind of mechanical tabulation.
“Nowhere is this more obvious than in this very case, where the Sentencing Guidelines assign just 2 points to Mr. Gupta for his abuse of a position of trust—the very heart of his offense—yet assign him no fewer than 18 points for the resultant but unpredictable monetary gains made by others, from which Mr. Gupta did not in any direct sense receive one penny,” he said.
He cited a “hypothetical but typical” case described by Professor Kate Stith at Yale Law School: a securities fraud defendant who inflated his company’s financial figures and caused investors to suffer $12.5 million in losses. In 1987, that executive would have had a guidelines range of 30-37 months. By 2003, that defendant’s range would be 151-188 months.
The dramatic increase was driven in part by Congress responding to public anger over the huge frauds at Enron and WorldCom, Rakoff said, “But in implementing the Congressional mandate, the Sentencing Commission chose to focus largely on a single factor as the basis for enhanced punishment: the amount of monetary loss or gain.”
Here, 20 of the 30 sentencing points assigned to Gupta reflected the gain by Rajaratnam and his Galleon hedge funds.
It was Rajaratnam who bought shares of Goldman just before the close of trading on Sept. 23, 2008— seconds after learning from Gupta that Warren Buffett was infusing $5 billion into Goldman—and it was Rajaratnam who made millions when the share price spiked.
And it was Rajaratnam who avoided millions of dollars in losses when he dumped Goldman shares on Oct. 24, 2008 based on inside information fed by Gupta that Goldman was about to post bad third-quarter results.
And Rajaratnam’s gain, he said, while a product of Gupta’s breach of trust, “is not even part of the legal theory under which the Government here proceeded, which would have held Gupta guilty even if Rajaratnam had not made a cent.”
“While insider trading may work a huge unfairness on innocent investors, Congress has never treated it as a fraud on investors, the Securities and Exchange Commission has explicitly opposed such legislation, and the Supreme Court has rejected any attempt to extend coverage of the securities laws on such a theory,” the judge said, for it was “Goldman Sachs, not the marketplace,” that was the victim in Gupta’s case.
Rakoff said the guidelines range “does not rationally square with the facts of this case,” chief among them being the defendant’s character.
“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,” Rakoff said. “The Guidelines virtually ignore this measure of the man, but here as elsewhere, the Guidelines must take second place to section 3553(a), which requires a court to take accounts of the defendant’s character in imposing sentence.”
Having taken Gupta’s character into account, and rejecting the notion that Gupta needed to be specifically deterred from committing crimes in the future, Rakoff turned to general deterrence.
“[N]o 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,” he said. “Thus, a relatively modest prison term should be ‘sufficient, but not more than necessary,’ for this purpose.”
@|Mark Hamblett can be contacted at email@example.com