On Tuesday, November 8, 2011, Judge Jed Rakoff issued an Opinion and Order and entered a final Judgment against Raj Rajaratnam, bringing a close to the SEC's first civil case against the former head of Galleon Management. Mr. Rajaratnam, who was previously convicted of insider trading charges (as discussed here) and sentenced to twelve years in prison (as discussed here), now has a $92 million civil judgment against him.
Following Mr. Rajaratnam's May conviction, the SEC moved for summary judgment against him. When responding, Mr. Rajaratnam "conceded that, because of the criminal conviction, he was collaterally estopped from contesting liability for insider trading on the five stocks here in issue, and that he did not oppose having an injunction entered against him based on this liability." Moreover, the Commission conceded that, because a $53.8 million forfeiture judgment was imposed in the criminal case, the SEC's request for $31.6 million in disgorgement was moot.
As a result, as the Court explained, the only remaining issue was whether to impose additional civil penalties against Mr. Rajaratnam, and if so, in what amount. Judge Rakoff said that Courts typically consider "(1) the egregiousness of the defendant's conduct; (2) the degree of the defendant's scienter; (3) whether the defendant's conduct created substantial losses or the risk of substantial losses to other persons; (4) whether the defendant's conduct was isolated or recurrent; and (5) whether the penalty should reduced due to the defendant's demonstrated current and future financial condition." Judge Rakoff explained that the amount of the financial penalty in Mr. Rajaratnam's criminal case was also relevant, along with the fact that his net worth "considerably exceeds the financial penalties imposed in the criminal case," rejecting Mr. Rajaratnam's argument that the financial penalties in the criminal case rendered further civil penalties unnecessary.
The Court noted that "SEC civil penalties, most especially in a case involving such lucrative misconduct as insider trading, are designed, most importantly, to make such unlawful trading 'a money-losing proposition not just for this defendant, but for all who would consider it, by showing that if you get caught … you are going to pay severely in monetary terms.'"
Judge Rakoff rejected the "event study" performed by Mr. Rajaratnam's expert, Gregg Jarrell (which sought to distinguish between the profit gained or loss avoided directly attributable to the use of material nonpublic information from the profit gained or loss avoided attributable to other lawful market events). The Court concluded that while such an approach might be appropriate in a private civil action, it had no place in the SEC case "because Congress has decreed that the definition of 'profit gained' or 'loss avoided' for purposes of SEC civil penalties is 'the difference between the purchase or sale price of the security and the value of that security as measured by the trading price of the security a reasonable period after public dissemination of the nonpublic information.' 15 U.S.C. § 78u-l(f)."
Although the parties disagreed on the amount of a base figure (differing by $2.6 million), the Court accepted Mr. Rajaratnam's lower figure and trebled it to reach a civil penalty of $92,805,705 and ordered Mr. Rajaratnam to pay that amount within 14 days.
Mr. Rajaratnam was also named as a defendant in the SEC's suit against Rajat Gupta, bringing new insider trading charges against him (as discussed here). A hearing was scheduled to be held in that matter on Tuesday as well. It can be expected that the U.S. Attorney's Office for the Southern District of New York, who filed charges against Rajat Gupta, will move to stay the civil case pending a resolution of the criminal matter (although no such motion has been filed yet).
Judge Rakoff's busy week continues on the afternoon of Wednesday, November 9, 2011, when he will hear oral argument on whether the settlement between the SEC and Citigroup Global Markets, Inc., is fair, adequate, and reasonable (as discussed here and here).