“Does the time fit the crime?” is commonly asked when we ignite the provocative debate over defining retribution for crime. A combination of civil and criminal penalties has been devised in order to reduce recidivism, protect the public and punish offenders. But the annual $38.9 billion cost of prisons and a closer examination of the implications of felons’ actions compel us to consider the worthiness of jail time in many cases. While rapists, drunk drivers and drug offenders can escape jail or garner public support for more lenient sentences, we see no such call to arms for the insider trader. Though insider trading merits some penalty, most of its offenders do not belong behind bars.
Theoretically, prison serves two purposes: to contain an offender so he cannot harm others and to provide a sufficiently unpleasant experience so he is deterred from undertaking future felonious actions. But monetary fines are the civil analogs that reflect punitive measures. Should they be harsh enough, they also advance the philosophy of deterring one via penalty.
Dual-pronged retribution for crimes that bear no materially negative ramifications is incongruous with the paradigms of our legal system, which constitutionally prohibit excessive punishment. For securities fraud or RICO Act violations, treble damages can be imposed against perpetrators. These people are required not only to compensate the government for misappropriated profits or avoided losses but also to pay hefty penalties. Hence, incarceration for people who have already returned their gains is inordinate. This assessment is particularly relevant for the majority of insider traders, whose gains are inconsequential in terms of harming society. Let’s be honest: A few million dollars generated in profits from private information is insignificant in the grand scheme of things. So long as they return their ill-obtained funds and are fined, these individuals do not need to be jailed.
Sometimes the feds want to make an example out of people. Martha Stewart, for example, had to pay $195,000 and recuse herself from any public company directorships for five years in order to settle insider trading charges with the Securities and Exchange Commission. She also spent five months in jail for obstruction of justice and conspiracy charges in conjunction with a controversial ImClone stock sale by which she avoided a paltry $45,000 in losses per her broker’s advice.
A savvy, self-made person who built a beloved public company did not belong in shackles and barred from her own firm. She did not mistreat society through this trade. In fact, more broadly sweeping pain was inflicted upon Martha Stewart Living’s investors when its leader had to forgo her responsibilities. In addition to the slide precipitated when Stewart relinquished her role as chairwoman and CEO, the stock dropped 22.6 percent once the guilty verdict was read and her resignation as chief creative officer became imminent.
Even in the case of hedge fund manager Raj Rajaratnam, many of the illegal gains or avoided losses were restricted to trading or investing parties themselves. According to the SEC and prosecutors, Rajaratnam and his cronies benefited from at least $60 million in wrongly obtained profits on positions including Goldman Sachs, Intel and Procter & Gamble.
First, it is hard to calculate the exact dollar amount of profiteering that can be attributed to these suspect trades because other developments and overall market movements influence fluctuations in a stock’s price. And central figures in the case were fined extremely heavily — in addition to a $5 million fine for criminal insider trading, Rajat Gupta was fined civilly for $13.9 million, per maximum penalties. A judge also mandated a two-year jail sentence.
Rather than spend $60,000 per year incarcerating Gupta — as New York does — authorities should use people like him more effectively. He already paid dear fines and does not belong with the likes of terrorists and bank robbers. Instead, the SEC and district attorney offices should retain Gupta to help spot patterns of suspicious trading and business activities. He could likely give them better insight into the questions they should pose and behaviors they should monitor to prevent more egregious violations. That, rather than jailing a 64-year-old former executive who didn’t commit crimes on the scale of a Madoff or an Enron, is a more effective way to protect the investing public.
Rajaratnam was sentenced to 11 years behind bars. Mothers Against Drunk Driving recently reported that the common maximum penalty for vehicular homicide is 10 to 20 years. Since negotiations for less-than-maximum sentences are the norm, fewer than 10 years is the probable average. It is incongruous that someone who trades on material nonpublic information can be jailed for the same time as a drunk driver who robbed an innocent victim of his life.
Attorney General Eric Holder recently voiced the popular viewpoint that much shorter sentences should be enforced for nonviolent drug offenders, saying, “By reserving the most severe penalties for serious, high-level or violent drug traffickers, we can better promote public safety, deterrence and rehabilitation — while making our expenditures smarter and more productive.” Adhering to this paradigm, one would imagine similar arguments against severe incarceration for those white-collar criminals who improperly trade using private information. Yet ironically, this group is unceremoniously denied the consideration that aggressive civil fines are sufficient. These people are simply not suitable for 8-by-10-foot concrete cells.
Elizabeth Fuerbacher ’13.5 transferred to Brown from Wharton, where she took a securities regulation class and learned of the alumni clubs across state penitentiaries. She can be reached at elizabeth_fuerbacher@brown.edu.
ADVERTISEMENT
