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Raj Pays The Max

[Updated version]

$92.8 million. That’s the size of the penalty handed down yesterday to convicted hedge fund manager Raj Rajaratnam. The NYT reports:

Combined with the fines and forfeitures ordered last month when he was sentenced to 11 years in prison for insider trading, Mr. Rajaratnam will be paying a total of $156.6 million…

Mr. Rajaratnam’s lawyers argued that given the financial penalties imposed in the criminal case — a $10 million fine and $53.8 million in forfeited profits — additional civil penalties were unwarranted.

Judge Jed S. Rakoff, the presiding judge in the S.E.C.’s case against Mr. Rajaratnam, rejected that notion.

“This misapprehends both the nature of this parallel proceeding and the purposes of civil penalties,” Judge Rakoff said in his order. “S.E.C. civil penalties, most especially in a case involving such lucrative misconduct as insider trading, are designed, most importantly, to make such unlawful trading a money-losing proposition not just for this defendant, but for all who would consider it.” He added that it was a warning that, if caught, “you are going to pay severely in monetary terms.”

So far, so good. High profile thieves should receive exemplary punishment.  Raj not only stole money; he damaged the essential fabric of  the complex financial system our common life as a people requires.  This willful and knowing gross abuse of a vital public trust cries out for punishment and shame and while Via Meadia doesn’t generally think we need more criminal statutes, the widespread contempt that too many powerful people in finance have demonstrated for basic principles of honesty and fair play suggests that something more draconian should be tried.

As the NYT story continues:

It is unclear how much money Mr. Rajaratnam has left. Judge Rakoff said that he reviewed the government’s presentence report, which is not public, and said that Mr. Rajaratnam’s net worth “considerably exceeds” the penalties imposed in the criminal case.

That is unfortunate, and will encourage others to think that even if caught, their risks are limited and that their families will remain wealthy even if they themselves take a financial haircut and go to prison.  It would be better for the public if such people worried that their families could be living in trailer parks by the time the government and those they had wronged were finished clawing back the money, assessing penalties and fines, and providing restitution and compensation.

It sounds harsh, but the restoration of trust in the American business community, and the reconstruction of the ethical norms that in the long run are necessary if high finance is to work at all, require that the system comes down like a ton of bricks on people who reach the highest stations in our corporate life and use that power and trust to steal and to cheat.

Mr. Rajaratnam like any ax murderer deserves all the protections and safeguards of the law, and we don’t need witch hunts and lynch mobs in this country.  Any new criminal statutes must be carefully drafted.  Still,  justice must be stern when the offenses are both grave in themselves, and so deeply damaging to the essential bonds that hold society together.

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  • sonofagunforbeer

    I think Raj Rajaratnam was head of Galleon, a Hedge fund whereas Rajat Gupta is the accused head of McKinsey.

  • WigWag

    “Perhaps there is still room for McKinsey, the firm Raj headed and betrayed, to come after what’s left of his money with a crack team of relentless legal bloodhounds. Going after him mercilessly and pursuing every dime is one way that McKinsey could demonstrate to its clients that the firm has a zero tolerance policy towards abuses of client trust. Let him worry as he sits in prison that what’s left of his fortune will be pulled to pieces by the most vicious litigators in the business.” (Walter Russell Mead)

    I believe that Raj ran Galleon not McKinsey. Professor Mead may be thinking of the recently indicted Rajat Gupta who allegedly gave inside information to Raj.

  • Wrong Raj(at)

    Professor Mead,

    C’mon! How about referring to Rajaratnam by his last name instead of calling him Raj? That may help you in distinguishing between Raj Rajaratnam and Rajat Gupta (the former McKinsey head).

  • J R Yankovic

    Points of fact aside, I think there is one serious problem with articles of this kind. As with a previous post or two, Prof Mead, you risk offending the sensibilities of certain tender-minded people, who seem to overflow with forbearance and mercy towards the big important advantage-takers (“HEY! Let him who is without sin . . .”) – whereas their compassion for the TAKEN seems to come in far more measured doses.

    Then again, who am I to question a certain school of logic? “I mean [the winner might argue], if he’s STOOPID enough to believe it, and I’m SMART enough to run with it, who’s worse for my success IN THE LONG RUN?” No doubt there is a kind of rough – if not jagged-toothed – social justice inherent a system which proudly rewards the smart and therefore deserving (however unscrupulous), while shamelessly punishing the “stupid” and thus UNdeserving (however differently- advantaged from the outset). I believe there’ve even been a notable few writers – some of them still pretty widely revered and read (Bernard Shaw and Oswald Spengler being two that come to mind) – who defended dogs eating dogs as one of the chief ways History has always moved forward.

    OTOH, what if many of the Mead-critics and Madof- and Rajaratnam-extenuators are simply trying to be better, more consistent Christians (or Jews, or Muslims, or Hindus, etc)? That IS one possibility that really disturbs me. For in that case I have a question. Why is it that so many Americans, many of them both articulately intelligent AND devoutly religious (at least the ones I tend to hear from), appear so ready to forgive sinners of the BIG, clever, aggressively manipulative kind? Whereas they seem so eager to punish sinners of the petty, gullible, appetite-driven kind? Which of the two kinds is the Book of Proverbs harder on, I wonder?

    Anyhow, something tells me if Adam Smith or any of the early Victorians were alive today, they’d say our present “culture” has been one really STOOPID way to fuel (or recover) a free-market economy. Much more any other kind.

  • Toni

    From the article: “Mr. Rajaratnam’s total fines and forfeiture paid to the government are among the largest ever paid by an individual white-collar defendant.”

    He has also been sentenced to 11 years in prison, “the longest-ever prison sentence for insider trading,” according to the Times.

    I don’t believe Mr. Rajaratnam ever calculated his own risks versus the long-term wealth of his family. He gambled that he wouldn’t get caught.

    I also think Prof. Mead frets too much about whatever millions are left in Rajaratnam family hands. They may behave like other heirs and fritter them away. But one thing we know for sure: they have before them an object lesson in criminal business behavior. I doubt any Rajaratnam heir is likely to get up to sharp financial practices.

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