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An Unjustified Sentence

An Unjustified Sentence

4 Min.
October 13, 2011

Eleven years.

One hundred, thirty-two months in which Raj Rajaratnam, a man capable of making millions through his ability to find out or figure out the prospects of companies and their stocks, may have to peel potatoes at 12 cents an hour instead.

Four thousand, fifteen days in which Raj Rajaratnam, who was born in Sri Lanka , went to England to study engineering, earned his MBA in Philadelphia and built a career and a business on Wall Street, will have to go where the Federal Bureau of Prisons sends him and obey rules and orders over which he has no say.

Raj Rajaratnam, at left.

Five million, seven hundred eighty-one thousand, six hundred minutes in which Raj Rajaratnam, who made a fortune and used it to provide for himself and take care of others, but who is ill and not very physically fit, will have to depend on medical care supplied by the government or by its permission, and will have to fear violence— possibly even sexual violence —from which he cannot escape.

And as long as the sentence is—and it is much longer than is typical in insider-trading cases—it’s less than half the maximum the government wanted, 24.5 years. Looking at that number, Rajaratnam’s lawyers offered , as points of comparison, the average sentences for other crimes in 2010:

For sexual abuse, 109 months—nearly two years less than Rajaratnam got.

For arson, 79 months—more than four years less.

Mr. Rajaratnam did no harm to the people with whom he traded.

For manslaughter, 73 months. That’s right: People who killed people got sentences more than four years shorter than Rajaratnam’s. (They did get longer sentences than his if their crimes rose to the level of murder—though even the average sentence for murder was less than the 24.5 years the government wanted to impose on Rajaratnam.)

What did Raj Rajaratnam, trader in stocks, do to deserve 132 months?

Prosecutors argued that his insider trading was an exceptionally serious crime because of the $72 million in profits he gained and losses he avoided by relying on information that was not easily available to all.

Normally, property crimes are measured by the loss inflicted on the victims. But even the prosecutors admitted that it was hard to identify victims or measure their losses directly. So they argued that the stock-market is a zero-sum game, and that however much profit Rajaratnam made, he took from someone else .

This is nonsense.

First of all, the stock market is not a zero-sum game. If a stock becomes more valuable, perhaps because the issuing company became more productive, it does not somehow take away money from everyone who doesn’t own that stock. It means they’ll have to pay more if they want to buy it—but (unless they’ve sold short) they do not have to buy it. It’s true that people who don’t own a stock when it goes up are missing an opportunity, but missing an opportunity is not the same thing as losing money.

Second, the previous owners of stocks Rajaratnam bought on inside information never owned the profits they would have made had they kept the stock. They only had the right to those profits if they chose to keep the stock long enough for its price to go up, then sell it before it went down. They chose not to keep it. Therefore, they never had the right to the money that Rajaratnam made.

Unlike robbers (average 2010 sentence: 77 months), who force their victims to surrender their property, Rajaratnam bought stocks from and sold them to willing traders at prices they freely accepted. One might argue that they would not have accepted the same prices had they known what Rajaratnam knew, but what Rajaratnam knew did not affect their decision that the price he was offering was worth accepting.

The substitution of Rajaratnam’s gains for victims’ losses obscures the fact that he, like insider traders generally, did no harm to the people with whom he traded. He does not deserve to spend eleven years in prison. He does not deserve to spend one day.

An Analysis of U.S. Attorney Preet Bharara’s Statement on the Raj Rajaratnam Case by Roger Donway

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