NEW YORK Danielle Chiesi, a former hedge fund trader and key defendant in the sprawling Galleon Group insider trading case, was sentenced on Wednesday to 2-1/2 years in prison, and the presiding judge gave a stern warning to others on Wall Street considering breaking the law.
Chiesi, 45, is the first major defendant to be sentenced in the government's probe, unveiled in October 2009 and centered on Raj Rajaratnam, founder of the Galleon hedge fund.
"The message to Wall Street needs to be loud and clear: If you trade on inside information, you will be caught; if convicted, you will be sentenced to prison," U.S. District Judge Richard Holwell in Manhattan said after imposing the sentence.
Rajaratnam, a one-time billionaire, was convicted on May 11, and faces a September 27 sentencing, also by Holwell.
Wearing a pale pink sleeveless silk dress, matching shoes and a pearl necklace, Chiesi, a former high school beauty queen, spoke briefly to the judge before being sentenced. She pleaded guilty in January to three conspiracy counts.
"I know there is a punishment for people who do wrong ... but it won't happen again," Chiesi, choking up, said in a whisper. She was ordered to report to prison on September 20.
Chiesi was also sentenced to two years of supervised release, 250 hours of community service and a $25,000 fine. Earlier this month, she agreed to a $540,535 settlement of a related U.S. Securities and Exchange Commission civil probe. Chiesi did not cooperate with prosecutors.
The prison term is shorter than the 37 to 46 months prosecutors sought, but longer than the 27 months Chiesi's former boss at New Castle Funds, Mark Kurland, received in May 2010 for his guilty plea to insider trading. Chiesi's lawyers said their client deserved less time than Kurland.
Holwell said community service is a "healthy substitute" for more prison, and gives Chiesi "an opportunity to adjust her moral compass, which obviously fell by the wayside."
After being sentenced, Chiesi was seen in the courtroom laughing as she shook hands with prosecutors and with an FBI agent who testified against Rajaratnam at his trial.
The laughter continued outside the courthouse, as Chiesi told reporters: "I told the FBI agent if they're ever going to knock on my door again, do it in the afternoon."
She was arrested on the same day as Rajaratnam, in an early morning takedown at her Manhattan apartment.
Rajaratnam was convicted on 14 counts related to insider trading, which prosecutors said resulted in $63.8 million of gains. He could get 19-1/2 years in prison under federal guidelines.
"There is nothing meaningful that Rajaratnam can do to mitigate his sentence," said Jacob Frenkel, a partner at Shulman, Rogers, Gandal, Pordy & Ecker in Rockville, Maryland and former federal prosecutor. "Even if he were to fall on his sword and tell all to the government, he wouldn't get much credit, because he went to trial."
A spokesman for Rajaratnam declined to comment.
Roughly 50 people have been charged in the insider trading probe. Of the 26 charged criminally in the Galleon portion, 25 were convicted or pleaded guilty, and one is missing. All but two, Chiesi and former Galleon employee Roomy Khan, are men.
AFFAIR WITH BOSS
Prosecutors called Chiesi the "consummate Wall Street insider." They said she would use her charm and physical appeal to talk up powerful sources and then get and leak inside tips.
Companies such as Advanced Micro Devices Inc, Akamai Technologies Inc and International Business Machines Corp were the subject of several tips, and Chiesi made $4 million from insider trading, prosecutors said.
Recorded phone calls played at Rajaratnam's trial showed Chiesi gloating that getting inside tips was a "conquest," and that she once played a supposed Akamai source "like a finely tuned piano" to learn about that company's outlook.
Chiesi's lawyers called her a needy, emotionally scarred victim of a nearly 20-year relationship with Kurland. They said she never paid or was paid for tips, or traded in her account.
But prosecutor Andrew Michaelson countered that Chiesi was more than just a "pawn" for Kurland. "Chiesi played a central and starring role in her crimes," Michaelson said. "She forged her relationships, she initiated her criminal conduct."
Alan Kaufman, Chiesi's lawyer, said after the sentencing that his client is "glad that the uncertainty is now over" and plans to move on with her life after completing her prison term.
The case is U.S. v. Chiesi, U.S. District Court, Southern District of New York, No. 09-01184.
(Editing by Martha Graybow, Gerald E. McCormick, Andre Grenon and Steve Orlofsky)