NEW YORK - (Mealey's) A federal judge in New York on Nov. 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.
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