The 11-year sentence meted out to Raj Rajaratnam, founder of the defunct hedge fund Galleon, will send a powerful warning to other investors tempted by insider dealing, figures in the industry say.

While the length of the jail imposed is controversial as it is longer than, say, some prison terms imposed on violent criminals in some nations, industry figures say the punishment could have been longer, and that it will demonstrate how seriously authorities now consider insider dealing. In the US case, prosecutors rejected the notion that insider trading is a "victimless crime".

“The 11 year sentence for a man described as `the modern face of illegal insider trading’ will be welcomed by all stakeholders in the integrity of capital markets,” said Peter Moore, head of regulation at UK compliance consultancy, The IMS Group.

“This was not a technical offence but deliberate conduct calculated to profit from illicitly obtained company information not yet known by the market. Essentially, Rajaratnam was securing a higher exam mark than he deserved by having caught sight of some of the answers before sitting the test,” Moore said.

The case was also significant to the UK industry, as the 11-year term exceeds the current 7-year maximum limit that a UK criminal court can impose, Moore said, noting that the Financial Service Authority has asked for a 10-year sentence to be made available.

The case turned on wiretap evidence revealing private conversations in which Rajaratnam gleaned and shared non-public company information, Moore continued.

“While evidence obtained in this way may not actually be admissible in a UK court, the UK regulator has had access to mandatory voice records of traders’ calls since March 2009. The FSA’s rules will be extended to mobile phones next month. The requirement is to maintain such records for six months.  The FSA’s recently enhanced trade surveillance system, ZEN, enables the FSA to detect suspicious trades which may result in the FSA contacting firms requesting that they preserve voice records beyond the six month timeframe,” he said.

Monique Melis, a member at financial advisory firm Kinetic Partners agreed the 11-year jail term was a strong warning to would-be insider dealers.

“Judge Richard Holwell’s agreement with the recommendation that sentencing should be 20-24 years shows that insider dealing will attract the same custodial sentencing as accounting fraud and Ponzi schemes. It should be noted that the sentence was only lowered due to ill health and no allowance was given to wait outside jail until the appeal works its way through the system; a clear signal how seriously this case was treated,” Melis said.

Rajaratnam, 54, was a central figure in one of the biggest insider trading cases in US history. The investigation made widespread – and controversial use – of wiretaps for the first time. Dozens of people have been convicted. Prosecutors say Rajaratnam made more than $72 million by using illegal tips to trade in stocks of companies including Goldman Sachs, Intel Corp, Google, ATI Technologies and Clearwire.

District Judge Richard Holwell sentenced Rajaratnam in Manhattan last week.