The Crime of Insider-Trading Punishment

"There is not even a chance we will do one day in jail,” Danielle Chiesi told Reuters last year, speaking of herself and Raj Rajaratnam.

“We didn't do anything wrong.” But on July 20, the former beauty queen was sentenced to 30 months in prison, plus supervised release, community service, and a fine of $25,000.

Last January, Chiesi pleaded guilty to conspiring to commit “securities fraud.” But it was a strange sort of fraud to which she confessed—because it did not involve deceiving its alleged victims. What Chiesi admitted doing was persuading people to give her business information and then relaying it to others. Those others then used the information to trade in stocks. United States Attorney Preet Bharara, whose office prosecuted Chiesi, tried to justify the prosecutions by saying that her prison sentence was for “repeatedly flouting the law and cheating ordinary investors in the process.”

Well, the law is what it is. But there are good laws and bad laws. Where was the cheating? Because of Chiesi’s information, her friends had a more accurate understanding of certain companies than most other people in the market. So what? The people with whom Chiesi’s friends traded made their own decisions to buy or sell based on what they knew. Chiesi’s friends did not deceive them about the value of the stocks involved, as would have been the case in an ordinary fraud.

Chiesi has been described by The New Yorker as a “blonde in her early forties [who] lived alone in midtown and slept with men who gave her stock tips .” But there is no solid evidence that she herself ever profited monetarily from the information she acquired. She seems to have acted simply for the thrill of the chase. On a recording played for the jury in the trial of Raj Rajaratnam, when the Galleon founder called to thank Chiesi for information, she replied, “It’s a conquest. It’s mentally fabulous for me.” “I love the way I feel right now,” she said.

The judge in Chiesi’s case, Richard Holwell, said the community-service portion of her sentence would “give her an opportunity to adjust her moral compass, which obviously fell by the wayside.” Perhaps it did. Seducing men into violating their obligations of corporate secrecy is hardly noble. But those such as Bharara and Holwell—who hold that it should be a crime to trade stocks based on one’s best information, or to pursue such information through voluntary interactions—need to adjust their own moral compasses.

—by Roger Donway and Alexander R. Cohen

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