The Galleon Case Is Nowhere Near Over
By PETER J. HENNING
Peter Foley/Bloomberg NewsRaj Rajaratnam leaving federal court on Wednesday after his conviction.With the conviction of Raj Rajaratnam on 14 counts of conspiracy and securities fraud, the Galleon Group insider trading case moves to its next phase.
Mr. Rajaratnam will remain free on $100 million bail at least until his sentencing, which is scheduled for late July, and he faces a possible prison term of up to 19½ years under federal guidelines. But his lawyers are set to appeal the guilty verdict, so this case will continue to play out over the next year or longer.
Here is a look at some of the issues that will arise as the case progresses:
The Post-Trial Steps
Once a guilty verdict is returned, a defendant has 14 days to file motions asking the judge to set aside the verdict or to order a new trial. The issue on the verdict is whether there was sufficient evidence for a rational jury to convict, while a new trial motion would focus on flaws during the proceeding that should be corrected. These motions are routine in criminal cases, and although they are granted infrequently, Mr. Rajaratnam’s lawyers can be expected to file them just to preserve the issue for his appeal of the convictions.
Judge Richard J. Holwell set the sentencing for July 29 in Federal District Court in Manhattan, although summer sentencing dates often slide back because of vacations and other scheduling issues.
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The United States Probation Office for the Southern District of New York will conduct a pre-sentence investigation of Mr. Rajaratnam and submit a report to the court about his background and the conduct leading to the convictions. This report is crucial in determining the sentence because it includes the Probation Office’s assessment of the impact of the violations and its analysis of the proper application of the Federal Sentencing Guidelines for a recommended punishment.
The lawyers for both sides will be given an opportunity to provide input to the Probation Office as it prepares the pre-sentence report, and Mr. Rajaratnam will be interviewed by a probation officer as part of the information-gathering process. Because judges tend to adopt the findings in the pre-sentence report and follow its sentencing recommendation, it is important for the government and Mr. Rajaratnam to pitch their positions at this point rather than just waiting to file objections with the court after the report is filed.
The pre-sentence report will not be made available to the public, although any objections filed with the court will give some information about its conclusions and recommendations, most importantly the sentence.
The Sentence
The Federal Sentencing Guidelines provide Judge Holwell with a recommended range for a prison term, although he has discretion to impose a different sentence that could be as much as 25 years if he has reason to deviate from the guidelines. To calculate the recommended sentence range, the court first looks to the “base offense level,” which is increased for the amount of Mr. Rajaratnam’s profits (and losses avoided) from insider trading, and then any other adjustments are made to calculate the final offense level to be applied.
The sentencing guideline for insider trading, § 2B1.4, provides for a base offense level of 8 points, plus 24 points can be added to account for the more than $50 million that the Justice Department contends Mr. Rajaratnam realized from the trading. The defense is likely to challenge that calculation of gains and losses avoided, so the Probation Office’s determination of that figure will be crucial for the final recommended sentence.
The government is likely to seek an adjustment for Mr. Rajaratnam’s playing an “aggravating role” in the criminal conduct, which involves acting as “an organizer or leader of a criminal activity that involved five or more participants or was otherwise extensive.” The Justice Department can point to the number of defendants who entered guilty pleas for passing information to Mr. Rajaratnam and one of his co-defendants, Danielle Chiesi, as the basis for seeking this enhancement of the sentencing recommendation, adding 4 points to the offense level.
Another potential enhancement involves abuse of a position of trust, which would increase the offense level by 2 points. The insider trading guideline, however, states that is adjustment “should be applied only if the defendant occupied and abused a position of special trust.” It is not clear whether being the co-founder and chief executive of the Galleon Group hedge fund would be viewed as a position of “special trust,” and I suspect Judge Holwell will not apply this provision in determining the offense level.
As such, the potential offense level for Mr. Rajaratnam is likely to be 36 points, and under the Sentencing Table in the guidelines, he would be looking at a recommended sentence of 188 to 235 months in a federal prison, i.e. 15½ to 19½ years. Under the federal Bureau of Prisons regulations, a prisoner can receive a 15 percent reduction in the sentence for good behavior, so the amount of time Mr. Rajaratnam would actually serve if Judge Holwell followed the recommended sentencing range would be approximately 13 to 16 years in prison.
This calculation assumes that the gains (and losses avoided) from the insider trading were more than $50 million, a figure the defense is sure to dispute. This is the main driver of the recommended sentence in white-collar crime cases, and so it will be a critical focus for both sides in the drafting of the pre-sentence report and any objections filed with Judge Holwell.
The bottom line: I expect the sentence to be about 15 years, and would be surprised if it were less than 10 years, if the court uses the Justice Department’s calculations.
The Appeal
The formal process of appealing the conviction cannot begin until after the final judgment is entered after sentencing. At that point, Mr. Rajaratnam can pursue the case in the United States Court of Appeals for the Second Circuit, which sits in the same courthouse in Manhattan where his trial took place.
There will undoubtedly be a number of challenges by the defense to Judge Holwell’s evidentiary rulings and the jury instructions, but the key issue — as it has been since the case started in October 2009 — is the wiretaps. In a sense, the conviction of Mr. Rajartnam was won in large part once Judge Holwell rejected the defense motion to suppress the wiretap evidence. A trial without that evidence would have made it far more difficult for the Justice Department to win a conviction.
Mr. Rajaratnam could not appeal the wiretap decision until after his convictions under federal procedural rules that limit the defendant’s right to challenge adverse decisions by the district court before trial. Now that there has been a conviction, the wiretaps will be front and center on the appeal.
If Judge Holwell was wrong in not suppressing the wiretaps, then a new trial would surely be necessary. If the decision to admit the wiretaps as evidence at trial is upheld by the Second Circuit, then Mr. Rajaratnam faces a very difficult task in finding other issues that would result in overturning the convictions.
Given the complexity of the case, the appeal will be argued about a year from now at the earliest, and a decision could then take months to be issued by the Second Circuit. Do not be surprised if this first appeal is not concluded until 2013, at which point Mr. Rajaratnam’s lawyers would probably try to have the Supreme Court review the case as a last step if the conviction is upheld.
Peter J. Henning, who writes White Collar Watch for DealBook, is a professor at Wayne State University Law School.
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