Non-Monetary Punishment for Insider Trading

By Luke Rona, Articles Editor

The AP reported Thursday that Raj Rajaratnam was sentenced to an 11 year prison term for insider trading.  The sentence is the largest ever for insider trading.  U.S. District Judge Richard J. Holwell remarked that Rajaratnam’s “crimes and the scope of his crimes reflect a virus in our business culture that needs to be eradicated.”  In addition, the former hedge fund founder was ordered to forfeit $53.8 million in illegal profits and fined $10 million.  Judge Holwell termed insider trading “an assault on the free markets that are a fundamental element of our democratic society. There may not be readily identifiable victims, but when the playing field is not level, the integrity of the marketplace is called into question and the public suffers.”

In 2009, Rajaratnam was one of the richest individuals in the world, with a net worth of approximately $1.3 billion.  The implementation of heavy non-monetary sanctions suggests that fines alone are not enough to deter egregious white collar crime.  The prosecutor in the Rajaratnam case observed that insider trading has high incentives and is difficult to detect and prove.  In that kind of situation, a monetary fine alone is not enough to deter someone from using insider tips and corrupting other inside sources.  The fine itself pales in comparison to the potential profit, and may represent only a small portion of an individual’s total assets.  The expected return from insider trading, acknowledging the risk of getting caught and punished, remains positive.

By adding non-monetary sanctions to the equation, the court can better deter high net worth individuals from committing economic crimes that injure society at large.  Rajaratnam, 54, has advanced diabetes and needs a kidney transplant.  His defense attorneys argued that Rajaratnam did not deserve to die in prison.  Maybe not, but non-monetary penalties do not always concern retribution or punishment in the individual case.  They serve as a deterrent to all.  This is precisely the “teeth” that a non-monetary sanction provides: it makes a potential insider subjectively value those 11 years in prison, and for most people, that value will be astronomically high.  High enough, hopefully, to make the expected return from insider trading negative, and successfully deter this type of crime.

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