Friday, October 26, 2012

Rajat Gupta sentence

The two year jail sentence and $5 m dollar fine imposed on Rajat Gupta will be debated for a long time. We need to be clear: the punishment is not for insider trading, although news headlines focus on the 'insider trading' case. Judge Rakoff's sentencing order makes it clear that, in the opinion of the learned judge, Gupta's offence was breach of trust. It also casts doubts on whether insider trading trading is as big an offence as it is made out to be:

The heart of Mr. Gupta’s offenses here, it bears repeating, is his egregious breach of trust. Mr. Rajaratnam’s gain, though a product of that breach, 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 Exchange Commission has explicitly opposed any such legislation, and the Supreme Court has rejected any attempt to extend coverage of the securities fraud laws on such a theory........In the eye of the law, Gupta’s crime was to breach his fiduciary duty of confidentiality to Goldman Sachs; or to put it another way, Goldman Sachs, not the marketplace, was the victim of Gupta’s crimes as charged. Yet the Guidelines assess his punishment almost exclusively on the basis of how much money his accomplice gained by trading on the information.At best, this is a very rough surrogate for the harm to Goldman Sachs. 

So Goldman was the victim and it is not at all clear that it suffered any loss on account of Gupta's actions. To put it differently, Gupta's actions were not worthy of a man of his stature but they caused no harm, at any rate no great harm, to anybody. His actions pale beside various acts of skulduggery in the corporate world, such as the fiddling of accounts, payment of bribes, misuse of corporate funds for personal gain etc. And yet, in the eyes of American law, Gupta merits a two year jail term.

It does appear that the sentence is more a reflection on the harshness of the American system, which has a tendency to hand out long sentences in the name of deterrence, than on the nature of the offence that Gupta is said to be guilty of. In making this suggestion, one is not even taking into account the many contributions and accomplishments of Gupta.


Sathya said...

I am some what surprised why would it matter if someone made distinguished contribution. Did the person break law and if he did then he needs to pay the price. I read Rajat may have gotten as high as 10 years under sentencing guideline, so he did get leniency.
It is easy to find and avoid evil folks, it is decent folks who flirt with illegal when they have no reason to trend that line who are dangerous.
Why in the heck did Rajat want to deal with and provide information to a slime like Raj ...

Sathya said...

Maybe this blog will give you the kind of balance in perspective -

sujatha said...

'Gupta's actions were not worthy of a man of his stature but they caused no harm, at any rate no great harm, to anybody.'
I don't quite agree with this as somebody gained out of it.
The possession of knowledge carries with it an ethical responsibility which he did not live up to . He got away with a lenient punishment.

Anonymous said...

"His actions pale beside various acts of skulduggery in the corporate world, such as the fiddling of accounts, payment of bribes, misuse of corporate funds for personal gain etc."

I've heard this argument time and again from Indians (in various contexts, not just this one), and it doesn't make any sense to me, whatsoever. It essentially amounts to saying: because murderers exist, petty robbers should be let free?

Yes, the American system is harsh. If one is caught with a pouch of drugs, they can go in for 5 years. Americans put more people in jail than any other country. If there was more evidence against Rajat on insider trading, he would have got a sentence closer to Rajaratnam's 11 years.

Even though the system is harsh, I think the correct question is whether its fair. Rajat had his opportunities: he spent money on the best lawyers, had the opportunity to settle for lesser punishment. That said, many suspected cases of insider trading among the lawmakers themselves gets overlooked in the US, which is unfair. With the incentive to break the law being so less in the US, I really don't see why punishment shouldn't be harsh.

In India, we don't even have institutional capacity for resolving straight-forward cases of crime, forget about white collar crime. Given this difference between the two societies, its not unnatural for us Indians to look at white collar crime relatively leniently. We'll get to the same point eventually, although it looks like it will take a century.

Anonymous said...

It is interesting to note that the Professor's opinion is that the sentence was harsh, when in fact, Judge Rakoff is known to be engaged in a personal war of sorts against harsh guidelines for white collar crime!

T T Ram Mohan said...


I just wanted to clarify that I am not among those arguing for a light sentence on the strength of Gupta's good deeds; at any rate, that is not the basic argument I would make. My contention is that his offence is not clearly defined and that it is not such as to merit a jail sentence. I repeat, the case against him is not that he engaged in insider trading, that would require proof of personal gain from trading.


decorr said...

I actually compare this to the Nitin Gadkari quid pro quo issue going on and the way supporters are defending Gadkari. Firstpost has a wonderful article - How our netas legal proof themselves - and I quote

Perhaps it’s their inherent resilience that has taught politicians how to dodge charges of corruption and criminality by finding refuge in law books and legal-proofing themselves.

If these deeds are legally tenable, how much they might have stolen, or the public money they might have wasted becomes immaterial.