Madoff and Rajaratnam: A New Financial Institute?

May 13 2011 by Ellie Opas in Loan Analyst |No Comments

Rajaratnam may remain rich As part of his insider trading conviction Raj Rajaratnam could face huge criminal fines and penalties, but the hedge fund founder could remain a rich man even if he is sent to prison for a long time. In 2009, Forbes magazine said the Galleon Group founder was worth $1.3 billion, tied for 559th in the world. He fell off the list in 2010.

Legal fees But the 53-year-old married father of three was still wealthy enough to fund a legal defense that lawyers have estimated cost many millions of dollars. Indeed, a single defense witness, a finance professor at the University of Rochester who studied Rajaratnam’s trades, was paid $200,000, according to trial testimony.

Conviction On Wednesday a Manhattan federal jury convicted Rajaratnam of 14 counts of securities fraud and conspiracy, in the biggest Wall Street insider trading case since a 1980s scandal involving financier Michael Milken and speculator Ivan Boesky. An appeal is planned, Rajaratnam’s lawyer said. Rajaratnam is subject to a potential $172.6 million criminal penalty, based on twice his $63.8 million of gains on stocks such as Goldman Sachs Group Inc and Google Inc, and a $5 million fine on each of the nine securities fraud counts. Rajaratnam could face a 15-1/2 to 19-1/2 year prison term under federal sentencing guidelines, prosecutors said. Lawyers said he must serve at least 85 percent of any prison term he gets. There is no parole in the federal prison system.

Rajaratnam’s money It is unclear how much money the Sri Lankan-born Rajaratnam still has. But lawyers outside the case said sums not held aside for government litigation would go to his family, with whom he could communicate periodically if he is in prison. “You’re not able to run a business from prison, but you can control your personal financial affairs,” said Ronald Nessim, a lawyer in Los Angeles and former co-executive director of the American Bar Association’s White Collar Crime Committee.

Where’s he going? Some white-collar convicts end up in medium-security prisons. Among them: Ponzi schemer Bernard Madoff. “Financial criminals usually end up in low-security prisons,” said Michael Vitiello, a criminal law professor at the University of the Pacific in Sacramento, California. “For Madoff, there may have been other considerations because of the enormity of the crime. Madoff is an arch-enemy for our time.” His 150-year sentence is also a factor. Madoff is 73. “Bernie in essence has a life sentence, so they will want him at a higher security level,” said John Webster, managing director of National Prison and Sentencing Consultants in Nashville, Tennessee.

Occupation While in prison, Rajaratnam would likely be assigned a job such as cleaning, gardening, maintenance or working in a kitchen. He could also end up working in a prison library. Prison officials might make use of Rajaratnam’s three decades in finance, including his business degree from the University of Pennsylvania’s Wharton School, said David Berg, a white-collar defense partner at Berg & Androphy in Houston. “An educated man such as him will be called on to teach other prisoners,” he said.

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