How Much Time In Jail Will A Little Bit Of Insider Trading Cost You?

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Raj Rajaratnam doesn’t want to spend the next 20 years in prison, which would be understandable for anyone, really, but especially for him given his unmentionable but Extremely Serious assortment of illnesses. But this perfectly sensible desire to not go away for two decades runs up against a problem, which is that the US Sentencing Guidelines call for a 19.5 to 24-year sentence.

Fortunately, those guidelines aren't mandatory, so his lawyers are working to convince the judge that Raj shouldn't get the longest insider trading sentence ever just because he is, according to the government, "arguably the most egregious offender of the insider trading laws prosecuted to date."

I find insider trading sentencing a bit perplexing and took Raj's case as a reason to try to make some sense of it - and to try to predict how long Raj is going down for.

This starts with the sentencing guidelines. A while back, Forbes discussed an online sentencing guidelines calculator that lets you do the math on how much time you’ll get in prison for doing various bad things. Forbes and the calculator and I will all point out that this is not legal advice, there are lots of factors, the sentencing guidelines are advisory, there are all sorts of things you can get charged with, and your mileage will generally vary a whole lot. (Also, just generally: don't insider trade.)

Still. You can use the calculator to mock up a naive prediction of the tradeoff between (1) cash, whores, etc. now vs. (2) time in prison later. I focused only on three things that are likely to matter for insider traders:

1.Are you “(i) an officer or a director of a publicly traded company; (ii) a registered broker or dealer, or a person associated with a broker or dealer; or (iii) an investment adviser, or a person associated with an investment adviser?” Then you really shouldn’t be insider trading.

2.Did you plead guilty? That helps - going to trial and getting convicted is a bad idea. (Going to trial and getting acquitted is, however, an excellent idea.)

3.How much did you steal? This can be controversial, since the government is fond of finding ways to maximize the amount they'll hold you responsible for. So, for example, in Raj's case the government is claiming that he made some $60 million, by subtracting buy price from sell price - ignoring the fact that stock prices can move for reasons unrelated to inside information. His lawyers think the amount is more like $40 million. In any case, this is one of those circumstances in which mo money can indeed lead to mo problems.

Just for fun we ran this for a variety of amounts of profit for (1) public-company officers/directors and financial-industry types who go to trial, (2) non-financial types who plead guilty, and (3) the middle category who has only one bad thing (being in the financial industry or going to trial), which happen to have the same enhancement. And we plotted a bunch of the Galleon sentences on the same graph to see how it looked. It looked okay:

Again! Not legal advice! Don't try this at home! In fact, this ignores most of what really happens in these cases. If you insider trade you can be accused of a whole complex of related things - from wire fraud to obstruction of justice - some of which will make your sentence worse. For example, this model predicts only about 10 years for Raj, while prosecutors think his guidelines range is 19.5 to 24 years.

But - overall this chart sort of works, in that the real sentences mostly more or less fit its naive predictions. Which suggests that the online calculator is a decent guess for how much each dollar of ill-gotten gains is going to cost you. And that Raj has some hope of getting out of prison before his constellation of ailments catches up to him.


Technical notes that you should probably ignore:

* x-axis is log of amount of profit in dollars; y-axis is years of sentence. * Curves calculated using the calculator at
- Uses 18 U.S.C. § 1348) as the statute of conviction (and a statutory maximum of greater than 20 years, as the maximum for insider trading is 25).
- Assumes no criminal history, zero victims, and no enhancements checked except, for "Industry" curves, the box for:The offense involved a violation of securities law and, at the time of the offense, the defendant was (i) an officer or a director of a publicly traded company; (ii) a registered broker or dealer, or a person associated with a broker or dealer; or (iii) an investment adviser, or a person associated with an investment adviser? - For "Trial" curves, assumes no acceptance of responsibility. For "Plea" curves assumes acceptance of responsibility with brief from prosecutor.
- Graphs bottom of guidelines range

* Dots are based on recent insider trading sentences in the Southern District of New York, mostly for Galleon-related matters, as follows (amounts of profit cobbled together from various sources and somewhat unreliable):
- Robert Moffat, 6 months, amount of gain unclear but argued in sentencing it's less than $5,000
- Ali Hariri, 18 months, gain $200-$400k
- Mark Kurland, 27 months, $900k
- Arthur Cutillo, 30 months, $378k
- Danielle Chiesi, 30 months, $900k
- Donald Longueuil, 30 months, $1.25mm
- Jason Goldfarb, 36 months, $1.1mm
- Craig Drimal, 66 months, $10mm