(Repeating to additional subscribers)
By Nate Raymond
NEW YORK, Sept 2 U.S. judges are imposing
increasingly long prison terms for insider trading, a Reuters
analysis shows. The rise is at least partly driven by the bigger
profits being earned through the illegal schemes, defense
The trend is likely to continue on Monday when former SAC
Capital Advisors manager Mathew Martoma is sentenced for what
prosecutors have called the most lucrative insider trading case
In the five-year period ending December 2013, insider
trading defendants received an average sentence of 17.3 months,
up from 13.1 months during the previous five years, or a 31.8
percent increase, the analysis of 207 insider trading sentences
shows. Cases that were reversed on appeal were excluded from the
The number of cases has increased, with 57 percent of the
sentences imposed in the past five years. The last three years
alone have seen two record sentences.
In 2011, former billionaire and Galleon Group hedge fund
founder Raj Rajaratnam received an 11-year sentence for an
insider trading scheme that netted him $63.8 million in illicit
profits. That was topped a year later when a New Jersey judge
issued a 12-year term on Matthew Kluger, a former corporate
lawyer accused of providing illegal tips in a $37 million
The uptick in big cases partly reflects a wave of
prosecutions led by Manhattan U.S. Attorney Preet Bharara. Since
October 2009, his office has charged 89 people with insider
trading and secured 81 convictions.
"The judges have seen a rash of these cases, so it may be
there is a sense that harsher punishments are needed," said Paul
Shechtman, a defense lawyer with Zuckerman Spaeder who has been
involved in insider trading cases.
Federal judges have discretion to impose any sentence,
though they are required to consider advisory guidelines set by
the U.S. Sentencing Commission. Within the judiciary, opinions
vary, with some judges saying that harsher sentences are
important to act as a deterrent and others saying the
punishments are greater than the crimes.
Bharara himself has pushed for tougher sentences, urging the
commission to revise its guidelines to provide for higher
penalties for insider traders who use particularly complex or
sophisticated means to execute their schemes.
"Based on our experience, the nature and scope of insider
trading activity has evolved substantially, but the guidelines
have not completely kept up," he testified in 2011 before the
The commission adopted changes that went into effect in
November 2012 that among other things increased sentences for
schemes in which defendants make calculated or repeated efforts
to trade on inside information.
It is not clear if Bharara's push for tougher sentences or
the revised guidelines have had an impact on the length of
It had already been rising because of the scale of the
profits reaped through insider trading, defense lawyers say.
CONVICTED IN FEBRUARY
On Monday, a federal judge in New York will weigh whether to
impose what could be a record insider trading sentence on
Martoma, a former fund manager at Steven A. Cohen's SAC.
A jury convicted Martoma, 40, in February of engaging in
insider trading that enabled SAC to make profits and avoid
losses of $275 million.
SAC last year pleaded guilty to insider trading and agreed
to $1.8 billion in criminal and civil settlements.
Ahead of Martoma's sentencing, the court's probation
department calculated that under the sentencing guidelines, he
could receive almost 20 years, a figure based in large part on
the size of the fraud.
The sentencing guidelines for insider trading rely heavily
on the size of the gain resulting from the crime, allowing for
the offense level to be graded higher based on a points system.
The higher the points, the higher the suggested sentence. For
example, because Martoma recorded a gain of more than $200
million his total points score reaches 36. The guidelines
suggest this could mean a sentence of 188-235 months for a
Martoma's lawyers in a court filing called the nearly
20-year figure "outrageous." And the probation department
ultimately recommended an eight-year sentence.
Prosecutors have told U.S. District Judge Paul Gardephe they
are not opposed to a prison term below the guideline range,
though they said that the probation department's recommended
sentence is too short.
Even an eight-year term would be the sixth longest sentence
for insider trading since 2004, the Reuters data shows.
The sentencing guidelines' reliance on gains and losses in
white-collar cases have prompted defense lawyers and even some
judges to press for changes.
Critics say the emphasis on profits fails to take into
account a defendant's intent and role in the scheme.
One critic of the guidelines has been U.S. District Judge
Jed Rakoff in Manhattan, who in 2012 sentenced former Goldman
Sachs Group Inc director Rajat Gupta for insider trading.
Under the guidelines, Gupta faced eight years because
Galleon Group made $5 million based on a tip prosecutors said
Gupta gave to Rajaratnam.
Rakoff sentenced him to just two years, saying the
guidelines' reliance on the monetary gains "effectively
guaranteed that many such sentences would be irrational on their
Not every judge thinks that way. U.S. District Judge Richard
Sullivan, who sits in the same court as Rakoff and has issued
seven of the 11 longest insider trading sentences during
Bharara's tenure, has said he does not share his colleague's
"I think anyone who engages in this kind of conduct for the
amounts of money that are involved here has to be on notice that
they're going to be looking at a lengthy jail term," Sullivan
said in sentencing a hedge fund manager, Anthony Chiasson, in
2013 to 6-1/2 years in prison.
In Martoma's case, prosecutors argued in court filings that
if penalties are not steep enough, "a trader may determine that
an opportunity to make illegal profits in the hundreds of
millions may be worth the relatively low risk of getting caught
and serving a short sentence of imprisonment."
Martoma's lawyers countered in court papers that an
eight-year sentence would not take into account personal
factors, such as the impact it would have on his wife and three
"Mr. Martoma is not perfect, but he is a good man," they
(Reporting by Nate Raymond in New York; Editing by Noeleen
Walder, Amy Stevens and Martin Howell)