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

Filing 251

OPINION AND ORDER:#101003 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. Defendant is ordered to make this payment, no later than 14 days after entry of the accompanying Final Judgment as to Defendant Raj Rajaratnam, by certified check, bank cashier's check, or United States postal money order made payable to the United States Securities and Exchange Commission. 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 Rafjaratnam is hereby permanently enjoined from violating Section 10(b) of the Exchange Act, Rule 10b-5 promulgated thereunder, and Section 17(a) of the Securities Act. The Court retains jurisdiction of this matter for purposes of enforcing the terms of this Order and of the Final Judgment as to Defendant Raj Rajaratnam filed contemporaneously herewith. The Clerk of the Court is hereby directed to close document number 232 on the docket sheet of this case. (Signed by Judge Jed S. Rakoff on 11/8/2011) (ae) Modified on 11/15/2011 (jab).

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
- -x

SECURITIES AND EXCHANGE COMMISSION
09 Civ. 8811 (JSR)
Plaintiff,
OPINION AND ORDER
v-

RAJ RAJARATNAM, et al.,
Defendants.

--x
JED S. RAKOFF, U.S.D.J.
Pending before the Court is the motion of the Securit
Exchange Commission ("SEC")

sand

for summary judgment against one of

the few remaining defendants in the above captioned insider
trading case, Raj Rajaratnam. 1 The SEC alleges that the defendant
engaged in a massive insider trading scheme, using his position
as head of Galleon Management Co., a multi billion dollar hedge
fund,

to trade on material, nonpublic information in violation of

Section 10(b) of the Securities and Exchange Act of 1934 and
Section 17(a) of the Securities and Exchange Act of 1933. See
Amended Complaint ("Am. CompI. ")

~ 1.

Specifically, the instant

motion seeks summary judgment against Rajaratnam with respect to
his alleged insider trading on shares of Intel Corp., Clearwire
Corp., Akami Technologies, Inc., ATI Technologies, Inc., and
PeopleSupport, Inc. See Plaintiff Securities and Exchange
Commission's Memorandum of Law in Support of Its Motion for

Although the SEC's motion also sought summary judgment against
defendant Galleon Management LP, the SEC and Galleon subsequently
settled, and the Court issued a final consent judgment against
Galleon on October 27, 2011.
1

Summary Judgment Against Defendants Raj Rajaratnam and Galleon
Management, LP ("SEC Br.") at 1. The motion seeks disgorgement,
prejudgment interest, injunctive relief, and civil penalties.
The motion was filed October 7, 2011. On October 13, 2011,
in the parallel criminal case, Judge Holwe11 sentenced Rajaratnam
to 11 years in prison, ordered him to forfeit $53.8 million, and
fined him an additional $10 million in criminal penalties. See
United States v. Rajaratnam, 09 Cr. 1184 (S.D.N.Y. Oct. 20,
2011). Accordingly, in his instant answering papers, filed
October 17, 2011, Rajaratnam conceded that, because of the
criminal conviction, he was collaterally estopped from contesting
1

lity 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. Opposition to Plaintiff's Motion for
Partial Summary Judgment on Behalf of Raj Rajaratnam ("Def. Opp.
Br.") at 1. For its part, the SEC conceded that, in light of
Judge Holwell's imposition

a $53.8 million forfeiture judgment

against defendant, its request for $31.6 million in disgorgement
was moot. See Transcript of 10/27/11 Oral Argument ("Tr.") at
2-3. Accordingly, the only remaining issue on this motion is
whether to impose additional civil penalt
Rajaratnam, and if so, in what amount.

2

s against defendant

ct courts

Section 21A of the Exchange Act authorizes dis

to assess civil penalties in the nature of fines against persons
who commit insider trading. 15 U.S.C.

§

78u-l. The statute states

that the amount of the penalty shall be determined by the Court
Din light of the facts and circumstances." 15 U.S.C.

§

78u­

l{a) (2). While this is a broad mandate, courts in this District
have typically considered such factors,

for example, as "(1) the

egregiousness of the defendant's conduct;
defendant's scienter;

(2) the degree of the

(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." SEC v. Haligiannis, 470 F. Supp. 2d 373, 386
(S.D.N.Y. 2007)

(citing SEC v. Coates, 137

F.

Supp. 2d 413, 429

(S.D.N.Y.2001)).
The amount of any financ

penalty in any parallel criminal

action may also be relevant. Defendant, indeed, argues that,
given the financial penalties imposed by Judge Holwell in the
criminal case, further civil penalties are unwarranted. See Def.
Opp. Br. at 5-8. This misapprehends both the nature of this
parallel proceeding and the purposes of civil penalt

. The

foremost focus of any criminal punishment is on the defendant's

3

moral blameworthiness and on the prison time thus merited. While
the concern with blameworthiness may

so bear on the monetary

aspects of a criminal sentence (such as the fine), more often, as
in the case of restitution and disgorgement, they are designed to
compensate victims and deprive the defendant of his ill-gotten
gains. By contrast, as the Court stated at the October 27
hearing, SEC civil penalties, most especial
such lucrat

in a case involving

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 .
going to pay severely in monetary terrns.

H

you are

See Tr. at 28 29.

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

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
tens of millions of dollars and continued
cries out for the kind

sown estimate t netted
years, this case

civil penalty that will deprive this

defendant of a material part of his fortune. See Plaintiffts
Reply Memorandum of Law In Support of Its Motion for Partial

4

Summary Judgment Against Defendants Raj Rajaratnam and Galleon
Management, LP (aSEC Reply Br.") at 10-13.
The question then becomes, how much?

SEC seeks the

maximum available penalty under the statute, which provides that
the Court may impose a penalty of up to, but no more than,
times the profit gained or the loss avoided.

ll

15 U.S.C.

"three

§

78u-1(a) (2). The Court agrees that this case meets every factor
favoring trebling. See Haligiannis, 470 F. Supp. 2d at 386.
The statute, however, further defines aprofit 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 nonpub1ic information.

ll

15 U.S.C.

§

78u-1(f). Once trebling is accepted, the key point of contention
between the part

s here is over what is the correct measure of

"profit gained" and a10ss avoided."
Defendant argues that the proper measure of "profit gained"
or a10ss 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 profits or losses
attributable to other, lawful market events. See Def. Opp. Br. at
8-11. In support of its argument, defendant includes an "event
study" performed by Professor Gregg A. Jarrell, an expert witness

5

in the criminal case. Def. Opp. Br. Ex. B, Declaration of Gregg
A. Jarrell ("Jarrell Decl."). Based on statistical modeling,
Professor Jarrell concludes that the profit attributable directly
to the non-public information defendant possessed is $22,300,551,
Jarrell Decl.

~

24, a figure substantially less than the more

than $30 million calculated by the SEC. See SEC Br. at 18.
In a private civil securities action, such an approach, and
such an "event study" calculation, might be appropriate.

But

here it has no place, 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). By its plain language, Congress instructed the

Court not to eliminate from the calculation of "profit gained" or
"loss avoided" any amount attributable to market factors other
than the defendant's inside information. Rather, once the Court
identifies the trading price of the security at a "reasonable
period after public dissemination of the nonpublic information,"
the Court should simply calculate the difference between that
price and the price the defendant paid for that security in order
to arrive at the profit gained or loss avoided. In so

6

prescribing, Congress doubt
uncertaint

s intended to avoid the very

s and complexities defendant here seeks to introduce,

as well as to adhere to the hoary principle that a wrongdoer
takes his victim (here, in effect, the market) as he finds it. In
tal clear

any event, the statutory language of Section 21A is c
and must be obeyed.

Defendant next argues that because he was personally
entitled to only a portion of the profits actually

ized from

the illegal trades he executed, the SEC's figure should be
reduced to the amount he personally gained. Def. Opp. Br. at 12.
On this approach, if one were to subtract from the profits made
on defendant's illegal trades the portion of profits that went to
Galleon (and thus its investors), as opposed to the percentage of
the profits defendant was personally entitled to through
management

s, his profit was only $4,725,150. Id. at 13. But

nothing in the text of the Section 21A supports this evasion, in
effect, of defendant's respons

lity, for the wrongdoing he

committed, and defendant cites no case law supporting this
improbable interpretation.
The statute does, however, leave one open question: how long
is a "reasonable period after publ
nonpublic information"? 15 U.S.C.

dissemination of the
§

78u-l(f). At oral argument,

defense counsel objected to the SEC's use of defendant's actual

7

realized gains in arriving at its base figure for the civil
penalty, as opposed to using the hypothetical "reasonable
period.

ff

Tr. at 7. In response, the SEC offered a calculation the

Government prepared for Judge Holwell in the criminal sentencing
proceeding, utilizing a 24-hour period after the dissemination of
the inside information as a "reasonable period." Id. at 5-6.
Defendant agreed that under Second Circuit precedent "within a
day of the announcement

generally [a reasonable period]." Id.

at 8 (citing SEC v. Patel, 61 F.3d 137, 140 (2d Cir. 1995)).
But even with this agreement, the parties cannot arrive at
agreement on the base figure.
while the defendant says

The SEC says it is $33,512,929,

is $30,935,235. Compare Plaintiff's

Post-Argument Supplemental Memorandum In Support of Plaintiff's
Motion for Partial Summary Judgment Against Defendant Raj
Rajaratnam ("SEC Supp. Br."), at 3, with Letter Brief of
Defendant Raj Rajaratnam dated Nov. 4, 2011. Although the reasons
for this difference are differences over what is the appropriate
method for calculating the day after figure in this case, the
Court determines that it need not resolve these somewhat
technical differences, since for present purposes the Court can
accept the lower figure and still fulfill all the purposes of a
civil penalty

this case.

Specifically, the Court determines

that these purposes can all be achieved by a trebling of the base

8

figure as long as that trebling results in a fine amount of at
least $90,000,000.
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. Defendant is ordered to make this payment, no
later than 14 days

ter entry of the accompanying Final Judgment

as to Defendant Raj Rajaratnam, by certified check, bank
cashier's check, or United States postal money order made payable
to the United States Securit
civil penalty is ent
financ

and Exchange Commission. This

ly in addition to the forfeiture and other

payments ordered by Judge Holwell and may not be used

to offset those payments in any respect. Final

,defendant Raj

Rajaratnam is hereby permanently enjoined from violating Section
10(b) of the Exchange Act, Rule lOb 5 promulgated thereunder, and
Section 17(a) of the Securi

s Act.

The Court retains jurisdiction of this matter for purposes
of enforcing the terms of this Order and of the Final Judgment as
to Defendant Raj Rajaratnam filed contemporaneously herewith. The
Clerk of the Court is hereby directed to close document number
232 on the docket sheet of this case.
SO ORDERED.
JE
Dated:

New York, New York
November 8, 2011
9

S

RAKOFF,

.D.J.