Rajaratnam Case: SEC Falls Short

Over the weekend, the cover headline of the Wall Street Journal read, "Trader Draws Record Sentence." If you hadn't heard, Raj Rajaratnam, the founder of the Galleon hedge fund, was charged with insider trading. The case has been going on for a couple years now and he finally was sentenced:

Raj Rajaratnam's remarkable journey from Sri Lanka to the heights of the hedge-fund world to felon ended Thursday when he was sentenced to 11 years in prison, the longest-ever term imposed in an insider-trading case.

Now, as far as the sentence, I don't think he'll come close to doing the entire sentence. We have seen it in the past. The bigger joke to me is the "fine:"

In a defining moment for the government's campaign to stamp out what it describes as rampant illegal trading on Wall Street, U.S. District Judge Richard Holwell in New York said during sentencing that the billionaire investor's crimes "reflect a virus in our business culture that needs to be eradicated." The judge also ordered Mr. Rajaratnam, who was convicted of securities fraud and conspiracy in May, to pay a $10 million fine and forfeit $53.8 million. The defense plans an appeal.

To a man that was once worth $1 billion, those are paltry sums. Now, who knows how much money this guy made the company through insider trading? If the rewards of insider trading are greater than the punishment, then why wouldn't more people insider trade? I don't know if it is as rampant as it once was, but it definitely happens. In cases like this, you have to set an example. When Michael Milken was arrested on securities fraud, he was fined $600 million, even that was small by comparison to the money he had made. The SEC had a golden opportunity to lay down the law, but they swung and missed.

There are bargains for and against insider trading, but the bottom line is that it is illegal now. If you want to discourage it in the future, you have to make examples of the people you charge. The SEC has fallen short in doing that.