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Analysis: U.S. Attorney's statement on Rajaratnam Case

Analysis: U.S. Attorney's statement on Rajaratnam Case


Summer 2011 issue -- On May 11, after the trial of Galleon hedge-fund founder Raj Rajaratnam (pictured below) had ended in a conviction on all counts, the U.S. Attorney for the Southern District of New York, Preet Bharara, came forth to give his understanding of it all. His statement is worth parsing, one element at a time.

Mr. Bharara: “Raj Rajaratnam, once a high-flying billionaire and hedge fund
manager. . . . "

Comment: Notice Mr. Bharara’s metaphor “once a high-flying. . . . ” In Western civilization, those words can evoke one metaphor only: the metaphor of Icarus, whose hubris led him to fly too near the sun and so to perish when his waxen wings melted. Immediately, then, in his first words Mr. Bharara is invoking the egalitarian’s deep-seated hatred of all who achieve greatly. The designation “billionaire” just enhances his appeal to envy.

Mr. Bharara: “. . . is now a convicted felon. . . ”

Raj Rajaratnam, at left.

Comment: Notice the vagueness of that description. Felonies include arson, burglary, robbery, murder, rape, and so on. They are what we think of as very serious crimes, as opposed to misdemeanors, such as petty theft, disorderly conduct, public intoxication, trespass, and so on. True, so many offenses have now been designated felonies that ACLU board member Harvey Silverglate estimates the average citizen commits three felonies a day . But as anti-business journalists have discovered, the term “felony” still sounds like a major crime to the public’s ear. Best, therefore, to call a businessman a “felon” and his acts “felonies” rather than identify the actual nature of his underlying misdeeds, which might be nothing more than violating some absurd SEC regulation.

"...a highly crafted course of character assassination."

But using such terms as “felon” and “felonies” can also profit anti-business prosecutors and journalists in a very specific way. We do not apply cost-benefit analyses to truly serious criminal behavior, and rightly so. We do not ask about the economic benefits of a Mob murder. It’s a felony: end of argument. Yet if people understood the actual “offenses” of businessmen like Raj Rajaratnam, rather than hearing them described as “felonies,” then they might begin to wonder about the costs and benefits of sending such a man to jail for 20 years. For example, even if one accepts the full verdict in the Rajaratnam case ( and there is every reason not to ), and even if one accepts the prosecution’s undoubtedly exaggerated estimate of what Rajaratnam netted from his alleged misdeeds, it comes to less than $60 million. If one throws out the jury’s mistakes (mistakes—even accepting current insider-trading law), his “ill-gotten gains” probably come to about $6 million. Given the billions of dollars in wealth that Raj Rajaratnam has legitimately and productively created for himself, his employees, this country, and the world, that is one or two orders of magnitude less than a rounding error. Ah, but calling his acts “felonies” keeps people from asking about the costs and benefits of incarcerating such a man.

Mr. Bharara: “a convicted felon, 14 times over.”

"Exactly what did
Mr. Rajaratnam do that was corrupt? We are never told."Comment: When prosecutors want to crush someone, they pile on the charges. Note, in the Rajaratnam case, how three sales from one insider tip became three separate felonies in the jury’s verdict (Counts 8, 9, and 10). That is rather like handing out a separate jaywalking ticket for each step a pedestrian takes across the street. Prosecutors do this for an obvious reason. A jury can look at a person indicted on one count or on several counts and extend to him a presumption of innocence. But eventually the very human belief sets in that “where there’s smoke there’s fire.” Thus, when prosecutors wanted to crush Michael Milken, they indicted him and his brother on 98 counts. An ordinary juror is going to think: Well, an innocent person, like me, might be wrongly accused of one crime or maybe several related crimes; he doesn’t get himself indicted on 98 criminal counts.

Mr. Bharara: “Rajaratnam was among the best and the brightest. . . .”

Comment: Here, Mr. Bharara enters into a highly crafted course of character assassination. “Best and brightest,” of course, echoes the title of David Halberstam’s anti-Vietnam War book, and refers mockingly to any anti-egalitarian elite whose hubris merits disgrace, in leftists’ eyes.

Bharara: “…— one of the most educated, successful and privileged professionals in the country.”

Comment: Mr. Bharara does not say that Mr. Rajaratnam was one of the most learned or one of the most knowledgeable financiers, but merely that he was one of the “most educated”—as if knowledge and wisdom were poured passively into Mr. Rajaratnam’s head by professors as he took a degree in engineering at the University of Sussex and an MBA at Wharton. And then he was one of the most “successful”—as though success followed directly from his being passively “educated.” Note the absence of any term that might actually explain Mr. Rajaratnam’s success, such as “industriousness,” “hard-work,” “productivity,” “creativity,” “imaginativeness,” “insightfulness,” or “perceptiveness.” And, lastly, he was “privileged.” This of course is the favorite adjective of our postmodern intellectuals, and it designedly equates the earned status of a self-made capitalist with the status acquired in traditional societies by family or conquest.

Bharara: “Yet like so many others recently, he let greed and corruption cause his undoing.”

"What harm did
Mr. Rajaratnam do, and to whom?"Comment: This is probably the closest that Mr. Bharara ever comes to naming Mr. Rajaratnam’s supposed sins. But exactly what harm was Mr. Rajaratnam prompted to commit because of greed? Exactly what did he do that was corrupt? We are never told. Mr. Bharara veers off on another line of rhetorical accusation.

Bharara: “The message today is clear — there are rules and there are laws, and they apply to everyone, no matter who you are or how much money you have.”

Comment: “No matter who you are”? Mr. Bharara, who served as an aide to Senator Charles Schumer of New York, might want to look at the studies that suggest members of Congress and their staffs  engage in insider trading. But set that aside. Not every rule, and not every law, should be a rule or a law. Rules and laws should not prohibit people from doing what is productive. They should prohibit people only from committing harm to others. Again, what harm did Mr. Rajaratnam do, and to whom? Cui malo?

Bharara: “Unlawful insider trading should be offensive to everyone who believes in, and relies on, the market.”

Comment: Will Mr. Bharara tell us why?Will he tell us what harm Mr. Rajaratnam did that may send him to prison for 20 years ? Cui malo?

Bharara: “It cheats the ordinary investor, . . .”

Comment: No. False. Wrong. Untrue. A lie. Read what one of the country’s leading experts on insider trading, Professor Stephen Bainbridge of the UCLA Law School, could have told Mr. Bharara: here .

Bharara: “…victimizes the companies whose information is stolen…”

"Who will prosecute the prosecutors?"

Comment: Talk about stealing. That is a stolen base. Yes, if someone hacks into a company’s computer, that is stolen information. And paying a person to hack into a company’s computer and steal that information should be a crime. But a Board member who tells a friend about a forthcoming merger has not stolen information; he has misused information that he was given. His company should be able to sue him for damages, but he should not face criminal charges. And certainly the friend whom he tells should not face any charges, criminal or civil, even if the friend pays the Board member for the information.

An employee who uses a company car for grocery shopping may be fired and even sued for gas and mileage, but he should not be arrested as a car thief. And if a friend pays the employee to take him grocery shopping in the company car, surely the friend should not be arrested as a car thief.

Bharara: “. . . and is an affront not only to the fairness of the market, but the rule of law.”

Comment: “Fairness of the market” can legitimately mean one thing only: a market from which force and fraud have been banished. Any other sense is illegitimate. But the most popular senses of “fair market,” all illegitimate, are typically those derived from the absurd concept of “perfect competition,” which really isn’t worth discussing any more. Nevertheless, see here for a discussion.

And as for the “rule of law”: Actually, the government’s prosecutions of insider trading are an affront to the rule of law, as Jonathan Macey of Yale Law School would be happy to inform Mr. Bharara . Under our system, as it has evolved, definitive rulings of the Supreme Court are supposed to determine the meaning of our laws, thus letting people know what they can and cannot do. Despite that, despite decisive Supreme Court rulings on the contours of insider trading, the SEC and the U.S. Attorney’s Office for the Southern District (that would be Mr. Bharara) continue to prosecute people for behavior that the Supreme Court has declared to be innocuous. The effect on the lives of the people prosecuted is, of course, oppressive in the extreme. To date, Mr. Rajaratnam is thought to have spent some $40 million , on defending himself.

Bharara: In just over 18 months, this office has charged 47 individuals with insider trading crimes; Rajaratnam is the 35th person to be convicted. We will continue to pursue and prosecute those who believe they are both above the law and too smart to get caught."

Comment: And who will prosecute the prosecutors who believe that they are both above the law and too smart to get caught? Quis custodiet ipsos custodes?

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経済学 / ビジネス / ファイナンス