Rajaratnam may stay rich even if he goes to prison

Published May 12, 2011

| Reuters

By Jonathan Stempel

NEW YORK (Reuters) - Raj Rajaratnam could face huge criminal fines and penalties as part of his insider trading conviction, but the hedge fund founder could remain a rich man even if he is sent to prison for a long time.

As recently as 2009, Forbes magazine said the Galleon Group founder was worth $1.3 billion, tied for 559th in the world. He fell off the list in 2010.

But the 53-year-old married father of three was still wealthy enough to fund a legal defense that lawyers not involved in the case have estimated cost many millions of dollars.

Indeed, a single defense witness, a finance professor at the University of Rochester who studied Rajaratnam's trades, was paid $200,000, according to trial testimony.

A Manhattan federal jury on Wednesday convicted Rajaratnam of 14 counts of securities fraud and conspiracy, in the biggest Wall Street insider trading case since a 1980s scandal involving financier Michael Milken and speculator Ivan Boesky. An appeal is planned, Rajaratnam's lawyer said.

Rajaratnam is subject to a potential $172.6 million criminal penalty, based on twice his $63.8 million of gains on stocks such as Goldman Sachs Group Inc <GS.N> and Google Inc <GOOG.O>, and a $5 million fine on each of the nine securities fraud counts. He also faces a possible U.S. Securities and Exchange Commission civil fine in a case that remains open.

It is unclear how much money the Sri Lankan-born Rajaratnam still has. But lawyers outside the case said sums not held aside for government litigation would go to his family, with whom he could communicate periodically if he is in prison.

"You're not able to run a business from prison, but you can control your personal financial affairs," said Ronald Nessim, a lawyer in Los Angeles and former co-executive director of the American Bar Association's White Collar Crime Committee.

"I've never heard of anyone telling a prisoner he can't control his own assets, or appointing a receiver for assets beyond what's necessary to satisfy a judgment," he added.

Rajaratnam could face a 15-1/2 to 19-1/2 year prison term under federal sentencing guidelines, prosecutors said. Lawyers said he must serve at least 85 percent of any prison term he gets. There is no parole in the federal prison system.

WHITE-COLLAR, BUT NOT MADOFF

U.S. District Judge Richard Holwell set a July 29 sentencing date. The appeals process could delay a sentencing. Rajaratnam's lawyer said he will challenge the government's use of wiretaps to gather evidence.

Following the verdict, Rajaratnam was ordered confined at his home in Sutton Place, one of the most affluent neighborhoods in Manhattan, and fitted with an electronic monitoring device.

If Rajaratnam were sent to prison, the Federal Bureau of Prisons would decide where to house him. It can choose among high-security, medium-security and low-security prisons, or an unfenced prison camp.

"It won't be a camp," Nessim said.

Lawyers said Rajaratnam could be placed in a low-security prison fairly close to home. They said the prisons bureau would consider factors such as the nature of his crime, the length of his sentence, the location of his family, his health, the harm he did to society, and the fact he is a first-time offender.

Low-security prisons are typically fenced in. One in Colorado houses former Enron Corp chief Jeffrey Skilling. One in Louisiana is home to former WorldCom chief Bernard Ebbers. Both men ran companies that collapsed in accounting frauds.

Some white-collar convicts end up in medium-security prisons. Among them: Ponzi schemer Bernard Madoff.

"Financial criminals usually end up in low-security prisons," said Michael Vitiello, a criminal law professor at the University of the Pacific in Sacramento, California. "For Madoff, there may have been other considerations because of the enormity of the crime. Madoff is an arch-enemy for our time."

His 150-year sentence is also a factor. Madoff is 73.

"Bernie in essence has a life sentence, so they will want him at a higher security level," said John Webster, managing director of National Prison and Sentencing Consultants in Nashville, Tennessee.

AN EDUCATED MAN

Other white-collar defendants end up in prison camp, Milken and Boesky among them.

And domestic doyenne Martha Stewart, convicted of obstruction of justice, spent five months in 2004 and 2005 in a prison camp for women known to some as "Camp Cupcake."

While in prison, Rajaratnam would likely be assigned a job such as cleaning, gardening, maintenance or working in a kitchen. He could also end up working in a prison library.

Prison officials might make use of Rajaratnam's three decades in finance, including his business degree from the University of Pennsylvania's Wharton School, said David Berg, a white-collar defense partner at Berg & Androphy in Houston.

"An educated man such as him will be called on to teach other prisoners," he said.

(Reporting by Jonathan Stempel in New York; Editing by Gary Hill)

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