By Grant McCool
NEW YORK (Reuters) - One-time hedge fund tycoon Raj Rajaratnam may get the longest prison sentence to date for insider trading, sending a harsh warning to anyone else who considers becoming a master of trading on confidential information.
Prosecutors are seeking one of the longest sentences ever for an insider-trading defendant, arguing that the 54-year-old Galleon Group founder is "the modern face" of illegal stock trading. The sentencing, which had been delayed, is set for Thursday.
Overall, people found guilty of insider trading tend to get lighter sentences than federal guidelines prescribe, in part because judges may opt to go easy out of the view that market trading crimes -- while harmful to confidence in financial markets -- typically does not harm anyone in particular.
The government has requested a prison term between 19-1/2 years and 24-1/2 years for Rajaratnam, who was convicted in May in one of the biggest Wall Street trading cases in a generation.
U.S. District Judge Richard Holwell in Manhattan may opt for a sentence that is less severe but that could still be very long, legal experts said.
"This is an opportunity for the judge to give a stiff sentence ... and yet also display the notion of elements of mercy," said Eli J. Richardson, a former federal prosecutor now at law firm Bass, Berry & Sims.
Rajaratnam will join a small club of fallen financiers and executives who have spent years behind bars for insider trading or related securities offenses.
Michael Milken, the so-called king of junk bonds, received a 10-year prison sentence in 1990 after pleading guilty to securities violations. Ivan Boesky, the famed Wall Street stock speculator of the 1980s, was sentenced to three years in prison in 1987 after pleading guilty to a criminal charge related to insider trading.
Rajaratnam's lawyers are fighting to allow him to remain under house arrest in his luxury Manhattan apartment while he appeals his conviction. They say he suffers from an array of health problems and that a long prison term would amount to a "death sentence."
Holwell has kept a customary silence about Rajaratnam's possible sentence. However, three months ago in sentencing a Rajaratnam associate, Danielle Chiesi, to 2-1/2 years in prison, he gave a stern warning to traders.
"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," Holwell said.
Rajaratnam also may be wary given the sentence handed to a former Galleon trader, Zvi Goffer, who was ordered last month to a decade in prison for his insider-trading conviction.
Prosecutors want Holwell to have Rajaratnam taken into custody immediately after sentencing. The judge could allow Rajaratnam to remain under house arrest while his case is on appeal, or surrender to prison at a later date, freeing him of the spectacle of being whisked away in handcuffs on Thursday.
If ordered to prison, Rajaratnam could spend his days cleaning toilets, sweeping floors and working in the library -- a far cry from running a hedge fund with $7 billion under management at its peak. His prison conditions could depend, however, on what authorities decide about his health.
In arguing for leniency, Rajaratnam's lawyers cite "chronic, life-threatening and degenerative diseases" that they argue the federal prisons bureau is unable to treat.
But it's difficult to prevail on that argument, said defense lawyers not involved in the case. Prisons can offer medical care, so Rajaratnam must show he suffers from a unique or particularly difficult problem, said Richard Scheff, chairman of law firm Montgomery, McCracken, Walker & Rhoads.
Rajaratnam's life already was radically transformed by his October 2009 arrest, 18 months of legal battles over FBI phone taps and then a two month-long trial, where former friends and business associates testified against him. He was convicted on 14 conspiracy and securities fraud charges.
The jury heard 45 telephone calls secretly recorded by investigators, evidence of his efforts from 2004 to 2009 to gain an illegal edge in stocks of companies including Goldman Sachs Group and Intel Corp. Prosecutors say he netted $63.8 million in illicit gains from the improper tips.
Rajaratnam, a U.S. citizen, was born in Sri Lanka. He earned an MBA from the University of Pennsylvania's Wharton School in 1983 and has lived most of his life in the United States. He is married and has three children.
Rajaratnam faces a federal lawsuit in New Jersey by victims of Liberation Tigers of Tamil Eelam, the separatist group defeated in the decades-long Sri Lankan civil war. Rajaratnam denies allegations that he gave money to the group.
If sentenced to more than 10 years, Rajaratnam could be sent to a medium-security prison with a hospital such as the Butner, North Carolina prison where swindler Bernard Madoff, 73, is serving a life term. Unlike low-security prisons where white-collar offenders often serve time, medium-security prisons are more restricted and house gang members, drug offenders and child molesters.
Rajaratnam's defense team declined comment on how he is preparing for the possibility of prison. But Larry Levine, a former inmate and founder of Wall Street Prison Consultants, said he will need to develop survival skills.
Levine said he would advise Rajaratnam to "say thank you, say excuse me, say please. Don't sit on somebody else's bunk. Don't pick up somebody else's property. Don't be changing the channel on the television."
The case is USA v Raj Rajaratnam et al, U.S. District Court for the Southern District of New York, No. 09-01184.
(Reporting by Grant McCool; Editing by Martha Graybow, Edward Tobin and Bernard Orr)