Securities and Exchange Commission v. Galleon Management, LP et al

Filing 248

MEMORANDUM OF LAW in Opposition re: 232 MOTION for Summary Judgment. DEFENDANT'S RAJARATNAM'S POST-ARGUMENT SUPPLEMENTAL MEMORANDUM IN OPPOSITION TO PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT. Document filed by Raj Rajaratnam. (Attachments: # 1 Exhibit 1, # 2 Exhibit 2)(Lynam, Terence)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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SECURITIES AND EXCHANGE COMMISSION,
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Plaintiff
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- v.§
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GALLEON MANAGEMENT, LP, et al.,
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Defendants.
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_______________________________________________ §

No. 09-CV-8811-JSR
ECF CASE

DEFENDANT’S RAJARATNAM’S POST-ARGUMENT
SUPPLEMENTAL MEMORANDUM IN OPPOSITION TO
PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT

Terence J. Lynam (admitted pro hac vice)
William E. White (admitted pro hac vice)
Akin Gump Strauss Hauer & Feld LLP
1333 New Hampshire Ave., NW
Washington, D.C. 20036
[phone]
Samidh Guha (SG-5759)
Akin Gump Strauss Hauer & Feld LLP
One Bryant Park
New York, NY 10036
[phone]
Dated: November 1, 2011
New York, NY

Attorneys for Raj Rajaratnam

TABLE OF CONTENTS
I. 

Methodology ........................................................................................................................1 

II. 

Other Considerations ...........................................................................................................6 

III. 

Conclusion ...........................................................................................................................9 

TABLE OF AUTHORITIES
Page(s)
STATUTES
15 U.S.C.
§ 78u-1(a)(2) .............................................................................................................................4
§ 78u-1(f) ...............................................................................................................................3, 4

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Defendant Raj Rajaratnam, through counsel, hereby submits this Supplemental
Memorandum addressing the issues raised at oral argument on October 28, 2011 regarding
disgorgement and civil penalties, if any.
I.

Methodology
In response to questions from the Court, the SEC proffered that the total profit on the five

stocks at issue (Clearwire, Akamai, PeopleSupport, ATI and Intel) would increase from
$31,563,661 to approximately $33 million if profit were calculated based on a hypothetical sale
at the closing price on the first trading day after the public announcement of the information at
issue. The SEC obtained these figures from information that the government submitted to Judge
Holwell in the criminal case in response to questions that Judge Holwell raised at a pre-sentence
hearing on the calculation of gain for Sentencing Guideline purposes. At that hearing, the
different methodologies for calculating profit or gain were discussed. The government argued
that its method of matching all purchases of the stocks at issue made after the alleged tip with the
corresponding sale after the public announcement was the appropriate calculation. The defense
pointed out that this method improperly inflated the gain because it swept into the calculation all
stock price movement from date of purchase to date of sale regardless of whether the price
moved as a result of the alleged inside information at issue. For some stocks, there were
significant time periods between the public announcement and the date by which all shares were
sold, e.g., for Clearwire – 18 trading days; for Intel – 12 trading days. The defense argued that
during this time period other market factors affected the share price and that it was inappropriate
to treat all price movement as gain “resulting from” the alleged inside information. Instead, the
defense presented expert testimony by Professor Gregg Jarrell who performed event studies that
isolated the gain attributable to the public announcement of the alleged inside information.

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As a result of this dispute over the proper methodology for calculating gain for
Sentencing Guidelines purposes, Judge Holwell asked the government to submit their
calculations of what the gain would be if all the shares were sold at the first closing price
following the public announcement. The government submitted these calculations and claimed,
as the SEC now does in this case, that the gain was higher if that “one day after” price was used.
The defense objected to the government’s calculations on several grounds, which are explained
below. At Mr. Rajaratnam’s sentencing, Judge Holwell did not specifically rule on these
objections, nor did he find a specific dollar figure for the gain amount. Rather, Judge Holwell
found that for all the stocks at issue (a total of twelve, including the five that are the basis for the
pending motion), the gain exceeded $50 million, which was all that was necessary for purposes
of determining the Sentencing Guidelines level. Therefore, the profit amounts that the SEC
proffers here for the five stocks at issue, based on the government’s calculations from the
criminal case, were not specifically accepted by the Court in the criminal sentencing proceeding.
The defense objections to these calculations that are relevant to the five stocks at issue
are set forth below:
1.

ATI – Mr. Rajaratnam purchased ATI stock over a five-month period prior to the

public announcement on July 24, 2006 that ATI was being acquired by AMD. Mr. Rajaratnam
sold all these ATI shares on that date following the public announcement. Instead of using the
actual sale price that day, the government’s “one day after” methodology uses the closing price
of the shares that day – a price higher than the actual sale price that occurred earlier in the day.
As a result, the government’s calculation increases the gain amount by approximately $2 million,
e.g., from $22.9 million to $24.9 million. See Declaration of James L. Canessa, filed in criminal
case in opposition to government’s “one day after” calculations, at 4 (attached as Ex. 1).

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2.

The government’s “one day after” calculation was based on the inclusion of an

additional 50,000 ATI shares that were not included in the original ATI profit calculation that was
presented by the government at trial. Canessa Declaration, Ex. 1, at 2
3.

ATI accounts for approximately 75% of the profit that the SEC seeks as the

disgorgement figure. As noted, Mr. Rajaratnam purchased ATI stock over a five-month period
preceding the acquisition announcement on July 24, 2006. The methodology used by the
prosecutors in the criminal case, and by the SEC here, sweeps in all share price increase during
this period and treats it as profit, or gain, resulting from the inside information. On the other
hand, the event study method excludes price increases due to other market factors and calculates
the gain resulting from the nonpublic information regarding the acquisition. That gain totals
$15,423,132. See Defendant Rajaratnam’s Opposition to Motion for Partial Summary Judgment
at Ex. B (Jarrell Declaration) and supporting Ex. 2. The likelihood that external market factors
other than material, nonpublic information influence the increase in stock price increases
substantially where there is a longer period of time between the alleged tip and purchase and the
subsequent announcement and sale. Professor Jarrell’s event study applies a rigorous and
routinely accepted methodology to maximize the accuracy of calculating the profit or gain taking
account of external market factors.
At oral argument on October 28, 2011, the Court focused on the statutory language in the
Exchange Act defining “profit gained” or “loss avoided” as “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-1(f). The event study method is consistent with this definition, as it focuses on the trading
price for the security on the day of, or day following, the public announcement (depending on

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whether the announcement is made during trading hours), which is “a reasonable period after
public dissemination.” The event study method looks at the “trading price” during that period
and determines what component of the trading price is attributable to the nonpublic information
that is now being disseminated – again consistent with § 78u-1(f).
The definition of “profit gained” or “loss avoided” is § 78u-1(f) must be read consistently
with the other statutory provision that precedes it, i.e., the penalty provision which provides for a
maximum penalty of three times the profit gained or loss avoided “as a result of such unlawful
purchase, sale or communication.” § 78u-1(a)(2). Thus, reading the two provisions together, the
profit must be the “result of” the unlawful activity, and must be calculated within “a reasonable
period after public dissemination of the nonpublic information.” The event study method
accomplishes these statutory directives by calculating the profit resulting from the unlawful
insider trading (and excluding profit caused by other factors) within one day of the dissemination
of the nonpublic information. The SEC, in its response to Mr. Rajaratnam’s Statement of
Undisputed Material Facts, does not dispute that “[e]vent studies use market modeling to
determine what portion of a stock’s price change on a particular day was the result of material
information and what portion was the result of normal market factors.” Plaintiff’s Response to
Defendant Raj Rajaratnam’s Counterstatement of Undisputed Material Facts at 2 (Para. 6). The
SEC also concedes that “[m]arket modeling allows changes due to normal market factors to be
removed, leaving only changes attributable to the release of material information,” (Id., Para. 7)
and concedes that the event studies performed in this case yield a disgorgement of $22,300,551
for the collateral estoppel stocks. (Id., Para. 8).
The significance of the event study method is best illustrated by the profit calculations for
ATI, for which there is a $7 million difference between the parties’ respective calculations. It is

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undisputed that Mr. Rajaratnam’s purchases of ATI occurred over an extended period from
March-July 2006. The SEC calculated the profit by including all the price gain during this
period through the date of the public announcement, which it claims totals $22,938,866. As
noted above, the SEC now seeks to increase that amount by approximately $2 million by using
the closing price on July 24, 2006, instead of the price at which the shares were actually sold
during that day. The event study method calculated how much the share price increased net of
normal market movement, following the public dissemination of the takeover announcement,
and applied that price increase to the number of shares held at that time. The profit calculated is
$15,423,132. This significant difference shows that not all price movement occurring a
reasonable period after dissemination of the nonpublic information is profit “as a result of” the
unlawful activity. The portion that is - $15,423,132 – should be utilized in making any necessary
calculations in this case under 15 U.S.C. § 78u-1(f).1
4.

The profit amounts that the SEC proffered at the October 28, 2011 argument

include stock trades that were not proven at the criminal trial and therefore are not the subject of
collateral estoppel. The evidence at the criminal trial established that Mt. Rajaratnam’s stock
trades were entered into Galleon’s order management system under certain 3-letter fund manager
codes, e.g., TAM, TMT, and TMP. The government did not attempt to prove that trades entered
under code CRS (for the Crossover Fund) were made by Mr. Rajaratnam. As part of the
sentencing proceeding, the government attempted for the first time to inject the CRS codes as
trades made by Mr. Rajaratnam and, accordingly, increase the gain calculation. The defense
objected and at sentencing the Court sustained the objection and excluded the CRS trades,

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Similar arguments would support the use of the event study method for Clearwire,
Akamai, People Support and Intel.
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finding that there was insufficient evidence that these trades originated with Mr. Rajaratnam.
10/13/11 Sentencing Tr. at 26. Nevertheless, the profit figures that the SEC proffered at oral
argument included profit that was calculated for trades made under the CRS code for Akamai and
Clearwire. For this additional reason, the Court should not consider the SEC’s newly proffered
profit amounts.
II.

Other Considerations
In calculating the profit gained or losses avoided, it is relevant that most of the gain was

not realized by Mr. Rajaratnam but by the investors in the Galleon funds where the stock trades
were made, i.e., the pension funds, university endowments, individual investors and others who
invested in Galleon. The total that would have been realized by Mr. Rajaratnam from the five
stocks at issue here is $4,725,150, which the SEC acknowledges is undisputed. See Plaintiff’s
Response to Defendant Raj Rajaratnam’s Counterstatement of Undisputed Material Facts at 3.2
Given the dispute between the parties on the accurate calculation of disgorgement and,
indeed, the SEC’s acknowledgement that its calculation does not factor out external market
factors, the undisputed amount realized by Mr. Rajaratnam -- $4,725,150 – could be utilized as
the base amount upon which any penalty is predicated. There is no authority of which we are
aware requiring the Court to adopt the disgorgement figure as a base on which to apply a penalty.
Indeed, the financial penalty already imposed by Judge Holwell with the $10 million fine is over
two times the amount Mr. Rajaratnam would have earned from these trades, and even a one-time

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In reality, Mr. Rajaratnam received far less compensation from trading in the
collaterally estopped stocks. Galleon’s funds had negative returns during 2008 and as a result
Galleon Management, L.P. received no annual performance fees in connection with its trading
that year. This means that the trades in Clearwire, Akamai and PeopleSupport, which occurred in
2008 and account for over $6 million of the SEC’s $33 million profit figure, actually generated
no performance fees. Accordingly, Mr. Rajaratnam received no compensation from these
contractual performance fees either.
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penalty based on a disgorgement figure of $33 million under the SEC’s calculations would
constitute almost eight times Mr. Rajaratnam’s actual potential gain.
Alternatively, the Court could utilize the criminal fine of $10 million imposed by Judge
Holwell as a touchstone for determining the appropriate fine in this matter. The criminal statutes
permitted Judge Holwell to impose a fine far in excess of that amount. Judge Holwell observed
the trial on all of the stocks, including the five at issue here, and all of the evidence presented
before electing to penalize Mr. Rajaratnam with a $10 million fine. It bears note that this $10
million fine imposed in the criminal case dwarfs any of the penalties imposed in total against any
of the Galleon defendants to date.
Finally, at oral argument, the Court indicated its view that Mr. Rajaratnam is a “bad guy”
(Tr. 22) and “someone who committed his wrongdoing to make a lot of money.” (Tr. 27). The
Court has not had the benefit of the Presentence Report (PSR) in the criminal case. While we
recognize the serious nature of the offenses for which he was convicted, which are discussed in
the Report, the Report also discussed at length many of the good things that Mr. Rajaratnam has
done in his life. Defense counsel quoted from the PSR at the sentencing hearing, as follows:
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The information that we provided the court and is now
contained in the presentence report provide a great deal of
insight into the history and characteristics of Raj Rajaratnam.
The letters that were submitted to the court by hundreds of
people all over the world describe the real Raj Rajaratnam. He
is the person whom I have come to know over the past two years,
a very kind, considerate, polite, generous and caring person, a
man genuinely concerned about helping others. I would like to
quote from a few of the provisions that the probation office
put in the presentence report about Mr. Rajaratnam.
The report says: "Mr. Rajaratnam cares deeply about
leaving behind a better world than the one to which he was
born." The report says that his charitable efforts go far
beyond his ability to write a check. The report said: "He
truly cares about the causes he champions, wants to see
children receive good educations, wants to help those struck by
natural disasters, and wants to help provide others with the
advantages that he was able to enjoy in his own life." Those
are not my words; those are the words that the Probation
Department put in the presentence report.

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As the court has learned, his compassion and
generosity have manifest themselves in many ways, from serving
on the board of the Harlem Children's Zone here in New York
City, a very worthwhile organization, to providing millions of
dollars to worthwhile organizations and individuals around the
world, from supporting global efforts like fighting AIDS and
poverty and natural disasters to helping needy individuals pay
for their cancer treatment or their children's education.
Raj Rajaratnam has attempted to make the world a
better place. If there is a ledger of one's life, he should
have some credit in that ledger to draw upon now that things
have gone bad.

10/13/11 Sentencing Tr. at 4-5.
The vast majority of the profit made by Galleon has never been questioned by the
government. Indeed, the stock trades at issue in the criminal and civil cases amounted to only a
fraction of 1% of the overall trades that Mr. Rajaratnam authorized during the years in question.
Mr. Rajaratnam traded over $100 million of stock every trading day – including during the ninemonth period when the wiretap was in place. Less than 1% of these trades have been alleged to
be based on inside information.
Mr. Rajaratnam has already suffered enormous financial consequences for his conduct.
Galleon, the company that he built, has gone out of business. Upon his arrest, Mr. Rajaratnam
was committed to making his investors whole and therefore responsibly and carefully wound
down Galleon, returning funds to each and every investor with a sizable return. What Mr.
Rajaratnam did not do is equally telling. He did not “gate” or restrict fund redemptions upon his
arrest, a lawful option that other hedge funds and hedge fund managers have invoked during
times of crisis. Had he done so, Mr. Rajaratnam would have reaped millions of dollars in
management fees during the early stages of these litigations. Instead, he moved swiftly to return
all funds to his investors to protect their interest, at great expense and loss of revenue to himself.
These actions, and others that Mr. Rajaratnam has taken during his life, show that he was
not motivated by greed or by the desire to make a lot of money. The overwhelming majority of
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the money that he made was the result of building a legitimate and successful business. The
Probation Office, after interviewing Mr. Rajaratnam and other people and conducting a careful
and rigorous analysis of Mr. Rajaratnam as a person and his conduct, included in its PSR a
discussion of its view of Mr. Rajaratnam's conduct - one that explicitly called into question
whether he was in fact motivated by greed given the fullness of his life and generosity. The PSR
discussed these factors and motivations in the Sentencing Recommendation Section in which the
Probation Office recommended a below-Guidelines sentence. We ask the Court to review the
independent assessment of the Probation Office contained in the Recommendation Section of the
PSR, which we attach hereto as Exhibit 2. 3 We believe it may assist the Court in understanding
Mr. Rajaratnam and the conduct at issue.

III.

Conclusion
For the reasons stated herein, and those provided in Mr. Rajaratnam's earlier brief and at

oral argument, we respectfully submit that the penalty already imposed on Mr. Rajaratnam from
the criminal case, combined with the civil injunction and lifetime bar, are sufficient to satisfy the
purposes of the civil penalty statute and that no additional civil penalty should be imposed.
Dated: November 1,2011
New York, NY

Respectfully submitted,

(admItted pro hac vice)
Terence J. Lyn
William E. White (admitted pro hac vice)
Akin Gump Strauss Hauer & Feld LLP
1333 New Hampshire Ave., NW
Washington, D.C. 20036
[phone]
Samidh Guha (SG-5759)
3 Defense counsel checked with the Probation Office and they advised that we are free to
submit this PSR material to the Court for Your Honor's consideration.

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Akin Gump Strauss Hauer & Feld LLP
One Bryant Park
New York, NY 10036
[phone]

Attorneys for Raj Rajaratnam

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CERTIFICATE OF SERVICE

The undersigned hereby certifies that a copy of the foregoing document was served by
causing a copy to be filed with the Court via CMIECF on this 1st day of November 2011 on:
VIACMIECF

Valerie A. Szczepanik
Securities and Exchange Commission
New York Regional Office
3 World Financial Center, Suite 400
New York, New York 10281
[e-mail]

Attorneyfor Plaintiff
Terence 1. Lyn~dmittedpro hac vice)
William E. White (admitted pro hac vice)
Akin Gump Strauss Hauer & Feld LLP
1333 New Hampshire Ave., NW
Washington, D.C. 20036
[phone]
Samidh Guha (SG-5759)
Akin Gump Strauss Hauer & Feld LLP
One Bryant Park
New York, NY 10036
[phone]

Attorneys for Raj Rajaratnam

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