NEW YORK - (Mealey's) A federal judge in New York on Tuesday,
November 8, ordered former Galleon Management Co. General Partner Raj
Rajaratnam to pay a nearly $93 million civil penalty to the Securities and
Exchange Commission for his role in a massive insider trading scheme (Securities
and Exchange Commission v. Raj Rajaratnam, et al., No. 09-8811, S.D. N.Y.).
According to an SEC press release announcing the ruling,
the civil penalty amount is "a record financial penalty." The SEC's press
release may be found online at http://www.sec.gov/news/press/2011/2011-233.htm.
U.S. Judge Jed S. Rakoff of the Southern District of New
York ordered Rajaratnam to pay $92,805,705 in civil penalties for his part in
the insider trading scheme, rejecting Rajaratnam's contention that further
civil penalties are unwarranted after U.S. Judge Richard J. Holwell of the
Southern District of New York sentenced Rajaratnam to 11 years in prison,
ordered him to forfeit $53.8 million and fined him an additional $10 million in
criminal penalties in a parallel criminal case.
"This misapprehends both the nature of this parallel
proceeding and the purposes of civil penalties," Judge Rakoff said in
disagreeing with Rajaratnam's argument.
"Here, the Court, at the request of the parties, has
reviewed the portions of the Pre-Sentence Report in the parallel criminal case
that set forth the defendant's net worth, which considerably exceeds the
financial penalties imposed in the criminal case. When to this is added
the huge and brazen nature of Rajaratnam's insider trading scheme, which even
by this own estimate, netted tens of millions of dollars and continued for
years, this case cries out for the kind of civil penalty that will deprive this
defendant of a material part of his fortune."
In reaching the $92.8 million civil penalty, Judge Rakoff
determined that "this case meets every factor favoring trebling," and used
statutory guidelines that call for a penalty "of up to, but no more than,
'three times the profit gained or the loss avoided.'" He also rejected
Rajaratnam's assertion that the proper measure of "profit gained" or "loss
avoided" "is the amount of such profit or loss directly attributable to the
advantages reaped from possessing the insider information illegally obtained,
as opposed to the profits or losses attributable to other, lawful market
events," and disagreed with Rajaratnam's claim that an event study compiled by
an expert witness in the parallel criminal proceeding should be used to reach
this civil penalty amount.
Judge Rakoff further found that Rajaratnam's contention
that because he was personally entitled to only a portion of the profits
actually realized from the illegal trades he executed, the SEC's figure (more
than $30 million) should be reduced to the amount he personally gained, which
was $4,725,150.
"[N]othing in the text of Section 21A [of the Securities
Exchange Act of 1934] supports this evasion, in effect, of defendant's
responsibility, for the wrongdoing he committed, and defendant cites no case
law supporting this improbable interpretation," Judge Rakoff stated.
Moreover, Judge Rakoff adopted Rajaratnam's base figure
for the civil penalty of $30,935,235, which was lower than the SEC's base
figure of $33,512,929, explaining that "for present purposes the Court can
accept the lower figure and still fulfill all the purposes of a civil penalty
in this case."
"Specifically, the Court determines that these purposes
can all be achieved by a trebling of the base figure as long as that trebling
results in a fine amount of at least $90,000,000," Judge Rakoff said.
"Accordingly, the Court trebles the defendant's figure of
$30,935,235 and arrives at a civil penalty of $92,805,705, which is hereby
imposed. . . . This civil penalty is entirely in addition to the
forfeiture and other financial payments ordered by Judge Holwell and may not be
used to offset those payments in any respect. Finally, defendant Raj
Rajaratnam is hereby permanently enjoined from violating Section 10(b) or the
Exchange Act, [SEC] Rule 10b-5 promulgated thereunder, and Section 17(a) of the
Securities Act [of 1933]."
The SEC filed its civil action in the District Court,
alleging that Galleon, Rajaratnam and a number of other Galleon officers and
directors violated Section 10(b) of the Exchange Act, SEC Rule 10b-5 and
Section 17(a) of the Securities Act by engaging in the massive insider trading
scheme.
In particular, the SEC contends that Rajaratnam used his
position as the head of Galleon, a multibillion dollar hedge fund, to trade on
material, nonpublic information, specifically on shares of Intel Corp.,
Clearwire Corp., Akami Technologies Inc., ATI Technologies Inc. and
PeopleSupport Inc.
Judge Rakoff issued a final consent judgment against
Galleon on Oct. 27, enjoining it from violating Section 10(b) of the Exchange
Act, SEC Rule 10b-5 and Section 17(a) of the Securities Act, and ordering it to
pay any disgorgement, including civil penalty, ordered against Rajaratnam.
[Editor's Note: Full coverage will be in the
November issue. In the meantime, the opinion is available at www.mealeysonline.com or
by calling the Customer Support Department at 1-800-833-9844. Document
#57-111114-095Z. For all of your legal news needs, please visit www.lexisnexis.com/mealeys.]
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