Is eleven years in prison for $75 million a fair trade or a short sell?

The trial of Raj Rajaratnam has been an interesting one for anybody interested in seeing how the federal government has responded to the wave of fiascos, failures and felonies that have stippled the financial services industry since late 2008, when AIG’s near-implosion touched off a shockwave so great that all kinds of behavior that had gone unnoticed previously earned fresh scrutiny, especially by federal financial cops looking to earn back some public trust after having failed so miserably to prevent a near-Depression and major financial crimes such as Bernard Madoff’s multi-billion-dollar Ponzi scheme.

The arrest, trial and conviction of Rajaratnam, head of the Galleon Group headge fund is a perfect example of what the government hopes to achieve in a new era of regulation and crackdowns. Rajaratnam earned as much as $75 million for himself from what prosecutors billed as a case of flagrant insider trading. The subject of an unprecedented two-year sting operation, in which other traders were pressured to wear wiretaps in order to gather evidence, Rajaratnam was intended to be the government’s head on a pike at the city gates. His case would be the legend to scare the rest of Wall Street into playing by the rules.

To do this, Rajaratnam was given 11 years in prison. To put this in perspective, it is the longest prison term ever given for insider trading (Michael Milken got only 10). and by white-collar crime standards, it is a pretty severe penalty. It is the result of new sentencing standards set in 1987 that intended to put an end to criminal financiers getting away with light sentences and/or stays in relatively comfortable prisons. No longer.

Another criteria of the new sentencing standards are to peg actual prison time to the amount of money illicitly gained by the convicted. This would account for Madoff’s incredible 150-year sentence, which essentially was a tool to ensure that he would die in prison. And while news reports have noted that Rajaratnam’s 11 years will certainly be enough to scare off other would-be inside traders, it still seems like the guy is getting off kind of light.

Let’s take, for instance, the federal notion of pegging prison time to money gained. If Rajaratnam got $75 million through insider trading, then his 11-year sentence means his money-for-time ratio comes down to $3.125 million per prison year. If his work in prison were meant to pay back what he gained illegally, that means he would have to have a job that paid $2,403 an hour. (This assumes he would work 52 weeks out of the year, five days a week, and five hours per day – as per the minimum-security prison work guidelines set by the North Carolina Department of Corrections.)

Who gets paid that? Not anybody stamping licence plates, that’s for sure. But wait, it gets even more out of whack. Rajaratnam is just the biggest fish in Operation Perfect Hedge, the case that collared him. Many of his colleagues got sentences as light as three years. Now, I doubt any of them earned $75 million illegally, but if they did, then their money-for-time ratio becomes $25 million per prison year, translating to an hourly prison work rate of $19,230 an hour. I don’t think you could top that even if you took over a government printing press and started manufacturing bills.

Prosecutors had sought sentences of 19 to 24 years, which would have translated into $2,403 an hour or $3,036 an hour, respectively, but even then, those rates are ridiculous when you are trying to make a connection between the nature of the crime and the time being extracted to pay for it. The bottom line is that at these rates, you’d have to engage in insider trading in order to pay off getting busted for insider trading.

Why not send Rajarantam up the river for the same amount of time as Madoff? The sentencing judge noted that Rajaratnam did have good deeds to his name, such as donating heavily after 9/11 and to the Sri Lankan tsunami relief. And, he has advanced diabetes (or “the sugah,” as a diabetic friend of mine calls it) that is bound to make his prison experience a more intense one. And to be sure, prison is no easy thing for anyone. Prison is a life-breaking experience; it is only a matter to what degree it breaks you.

But so what? This guy and his fellows thought they were hurting nobody by breaking the law, but they hurt everyone by undermining our trust in the very system of financial investment on which so many people’s fortunes depend. 

“His crimes and the scope of his crimes reflect a virus in our business culture that needs to be eradicated,” said the judge who sentenced Rajarantam. Indeed, they do. And with a virus this bad, you don’t kill it with children’s medicine. It would have been nice to see Rajaratnam get a sentence a little more symbolic, say 15 or 20 years, both to give more gravity to his crimes, and to send an even stronger message to all that our capitalist system – which has done so much to benefit so many – works best when it is run honestly and transparently. Rajarantam and his buddies felt otherwise. And now they must pay. Too bad it only looks like a down payment.