Mercer v. Gupta

Filing 26

MEMORANDUM OF LAW in Support re: 25 MOTION to Dismiss Complaint. /Memorandum Of Law Of Defendant Rajat K. Gupta In Support Of His Motion, Pursuant To Fed. R. Civ. P. 12(b)(6), To Dismiss The Complaint. Document filed by Rajat K. Gupta. (Oberman, Michael)

Gary P. Naftalis
Michael S. Oberman
KRAMER LEVIN NAFTALIS & FRANKEL LLP
1177 Avenue of the Americas
New York, New York 10036
[phone]
Attorneys for Defendant Rajat K. Gupta

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
JAMES MERCER,
Plaintiff,
:

11-cv-3828 (JSR)

V.
RAJAT K. GUPTA,
Defendant.

MEMORANDUM OF LAW OF DEFENDANT RAJAT K.
GUPTA IN SUPPORT OF HIS MOTION, PURSUANT TO
FED. R. CIV. P. 12(b)(6), TO DISMISS THE COMPLAINT

TABLE OF CONTENTS

Page
TABLE OF AUTHORITIES

ii

PRELIMINARY STATEMENT

1

ALLEGATIONS OF THE COMPLAINT

2

ARGUMENT

4

THE COMPLAINT FAILS TO STATE A CLAIM UNDER § 16(b)

4

A.

Section 16(b) Is To Be Narrowly Construed

5

B.

Section 16(b) Does Not Cover Tipper-Tippee Claims

6

C.

The Complaint Does Not Adequately Plead That Mr. Gupta Was The Beneficial
Owner Of The Subject Securities Or That Mr. Gupta Profited From Short-Swing
Transactions

8

D.

The Safe Harbor Exemption Precludes Liability

CONCLUSION

12
14

TABLE OF AUTHORITIES
Page(s)

CASES

Allaire Corp. v. Okumus,
433 F.3d 248 (2d Cir. 2006)
Blau v. Lehman,
368 U.S. 403 (1962)

5
6, 7

In re Cady, Roberts & Co.,
No. 8-3925, 1961 WL 60638 (S.E.C. Nov. 8, 1961)
Feder v. Frost,
220 F.3d 29 (2d Cir. 2000)
Foremost-McKesson Inc. v. Provident Secs. Co.,
423 U.S. 232 (1976)
Gwozdzinsky v. Zell/Chilmark Fund, L.P.,
156 F.3d 305 (2d Cir. 1998)
Jewel Source, Inc. v. Primus Jewelers, LLC,
No. 11 Civ, 3941(JSR), 2011 WL 4634019 (S.D.N.Y. Oct. 3, 2011)
Litzler v. CC Invs., L.D.C.,
362 F.3d 203 (2d Cir. 2004)
Magma Power Co. v. Dow Chemical Co.,
136 F.3d 316 (2d Cir. 1998)
Official Comm. of the Unsecured Creditors of Color Tile, Inc. v.
Coopers & Lybrand, LLP
322 F.3d 147 (2d Cir. 2003)

6
12-13
5, 6
.5
4-5
2 n.1
5

,

Reliance Elec. Co v. Emerson Elec. Co.,
404 U.S. 418 (1972)
Roth v. Jennings,
489 F.3d 499 (2d Cir. 2007)
S & S Realty Corp. v. Kleer-Vu Indus., Inc.,
575 F.2d 1040 (2d Cir. 1978)

12

7
5, 8, 9, 10
8

Strauss ex rel. GSI Commerce, Inc. v. Comcast Corp.,

No. 03 Civ. 9795 (NRB), 2004 WL 1846301 (S.D.N.Y. Aug. 17, 2004), affd,
149 F. App'x 15 (2d Cir. 2005)

8

STATUTES & RULES
15 U.S.C. § 78p(a)

14

15 U.S.C. § 78p(b)

passim

17 C.F.R. § 240.16a-1(a)(2)
Fed, R. Civ. P. 12(b)(6)

2, 9, 12, 13
1, 12

OTHER AUTHORITIES

S. 2369, 73d Cong. § 15(b)(3) (1934)
Peter J. Romeo and Alan L. Dye, The Section 16 Deslthook (2011)
Securities and Exchange Act of 1934: Hearings before the Committee on
Banking and Currency on S. Res, 84, S. Res. 56 and S. Res. 87
Before the S. Committee on Banking and Currency, 73 Cong. 6500
(statement of Thomas G. Corcoran, Office of Counsel Reconstruction
Finance Corp.)

7
1,8

7

Rajat K. Gupta respectfully submits this memorandum of law in support of his
motion, pursuant to Fed. R. Civ. P. 12(b)(6), to dismiss the Complaint.
PRELIMINARY STATEMENT
This action was prompted by the SEC's Order Instituting Proceedings ("OIP")
against Mr. Gupta dated March 1, 2011. Plaintiff James Mercer sent his statutory demand letter
on March 11, 2011 (Compl. If 17), and the Complaint, tiled on June 6, 2011, largely tracks (and
attaches a copy of) the OIP. The over-arching allegation of the OIP is that Mr. Gupta tipped
material nonpublic information to Raj Rajaratnam, including information about The Goldman
Sachs Group, Inc. ("Goldman Sachs"). While the OIP asserts claims under the anti-fraud
provisions of the federal securities laws, Mr. Mercer—as a shareholder of Goldman Sachsattempts to convert the OIP's allegations into a claim on behalf of Goldman Sachs under § 16(b)
of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b).
The attempt fails. Section 16(b) plays a completely different role than the antifraud provisions, and reaches a more limited scope of conduct. Section 16(b) is a strict liability
statute designed to deter corporate insiders from using confidential information about their
companies for personal trading in their companies' stocks by making insiders disgorge any shortswing profits they derived from purchases and sales completed within a six-month period.
Generally, § 16(b) is applied narrowly and mechanically. Of greatest importance to this action, §
16(b) "[d]oes not impose liability for tipping inside information to others, as evidenced by an
unsuccessful attempt to cover tipping in an early version of the legislation which eventually
became Section 16." Peter J. Romeo and Alan L. Dye, The Section 16 Deskbook, § III.A at 382
(2011) (citing Blau v. Lehman, 368 U.S. 403, 412 n.12 (1962)).
Congress' omission of language in § 16(b) covering tipping is fatal to the
Complaint, because the Complaint's allegations are all about tipping and not about trading by

Mr. Gupta. The Complaint fails to allege a purchase or sale by Mr. Gupta of even a single share
of Goldman Sachs stock. Tracking the OIP, the Complaint alleges that Mr. Gupta tipped
information to Mr. Rajaratnam, which supposedly resulted in trades in Goldman Sachs stock by
the "Galleon Tech funds" (defined in Compl. ¶ 4).

,

The failure of Mr. Mercer's § 16(b) claim is clear when the words of the statute,
and the related SEC regulations, are applied to the facts. We show below that the Complaint fails
adequately to allege that Mr. Gupta was a beneficial owner of Goldman Sachs shares held by the
Galleon Tech funds or that he realized any profits from short-swing trading by the Galleon Tech
funds in Goldman Sachs stock. On the contrary, the allegations of the Complaint—along with
what the Complaint fails to allege—show that Mr. Gupta is sheltered from liability by an
exclusion in Rule 16a-1(a)(2)(iii), which provides that a shareholder of a corporation (such as the
Galleon Tech funds) will not be deemed a beneficial owner of that corporation's portfolio
shareholdings "if the shareholder is not a controlling shareholder of the entity and does not have
or share investment control over the entity's portfolio." The Complaint should be dismissed with
prejudice.'

ALLEGATIONS OF THE COMPLAINT
Mr. Mercer (a resident of Kirkland, Washington) brings this derivative action on
behalf of Goldman Sachs, a Delaware corporation headquartered in New York, New York.
(Compl. irl[ 1-2). Mr. Gupta was a member of Goldman Sachs' Board of Directors from

1 Mr. Gupta also seeks dismissal of the Complaint on the ground that its claim is barred by the
two-year statute of limitations in § 16(b). Mr. Gupta contends that this two-year period is not
subject to tolling based on the failure to file under § 16(a). While the Second Circuit holds that
noncompliance with § 16(a) does toll the limitations period, see Litzler v. CC Invs., L.D.C., 362
F.3d 203, 208 (2d Cir. 2004), the Supreme Court is reviewing this precise issue in Credit Suisse
Securities (USA) LLC v. Simrnonds, No. 10-1261, scheduled for oral argument on November 29,
2011.

2

November 2006 through May 2010 and, as such, was an insider of Goldman Sachs for purposes
of § 16(b). (Compl. If 41).
The Complaint, echoing the OIP's allegations, charges that Mr. Gupta on "'a
number of occasions' divulged to Mr. Rajaratnam material nonpublic information that Mr. Gupta
obtained in the course of his duties as a member of the Goldman Sachs board." (Compl. ¶ 15,
quoting DIP Ill 1), Mr, Rajaratnam, '"in turn [] either caused the Galleon hedge funds that he
managed to trade on the material nonpublic information, or passed the information on to others at
Galleon and caused trades based on the information."' (Id.). The Complaint relies on the OIP for
"trading details and information from private phone calls between Mr. Gupta and Mr.
Rajaratnam and others, as well as private telephone records and calendar entries." (Id.).
The Complaint alleges as a heading in bold type in paragraph 43 that "Mr. Gupta
Had the Opportunity to Profit or Share in Profit from His Numerous Business Collaborations
with Mr. Rajaratnam." Quoting the OIP, the Complaint alleges that Mr. Gupta "had a variety of
business dealings with Rajaratnam and stood to benefit from his relationship with Rajaratnam"'
and that Mr. Gupta was "'an investor in, and a director of, Galleon's GB Voyager Multi-Strategy
Fund SPC, Ltd., a master fund with assets that were invested in numerous Galleon hedge funds,
including those that traded based on Gupta's illegal tips.' (Compl. ¶ 43, quoting OIP ¶ 4). The
Complaint further alleges that Mr. Gupta "directly profited from the short-swing transactions
because Mr. Rajaratnam undoubtedly paid Mr. Gupta for his inside infounation. This was Mr.
Rajaratnam's modus operandi." (Id. ).
However, the Complaint offers no plausible allegations about the timing or
amount of any such payments to Mr. Gupta tied to short-swing profits. Instead, the Complaint
relies on testimony of Anil Kumar on what Mr. Rajaratnam paid to Mr. Kumar for information

about companies other than Goldman Sachs as the basis for the speculation that Mr. Rajaratnam
"undoubtedly paid Mr. Gupta for his inside information." (See Compl. If 43). Misquoting a
document, the Complaint alleges that Mr. Rajaratnam represented by letter dated August 4, 2008
that Mr. Gupta's balance in the Galleon's Voyager Funds was $16,406,974 through June 30,
2008, supposedly "a mere few weeks after Mr. Gupta's inside information on Goldman Sachs'
second quarter results resulted in a $13.6 million short-swing profit for the Galleon funds."
(Compl. ¶ 48).2 The Complaint then alleges that Mr. Gupta's balance in Voyager was
"calculated based on something other than direct fair market value payments by Mr. Gupta for
fund shares" and "[i]t is most likely, and is therefore alleged, that at least a portion of Gupta's
$16,406,974 balance in Voyager was a quid pro quo for bringing something new 'to the party' in
the form of inside information on Goldman Sachs securities that were profitably traded on the
short-swing." (Id.).

ARGUMENT
THE COMPLAINT FAILS TO STATE A CLAIM UNDER 16(b)
This Court recently stated the standard for a Rule 12(b)(6) motion as follows:
To survive a motion to dismiss for failure to state a claim under
Rule 12(b)(6), "a complaint must contain sufficient factual matter,
accepted as true, to 'state a claim to relief that is plausible on its
face.'"Ashcroft v. Iqbal,
U.S.
„ 129 S.Ct. 1937,
1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly,
550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). Mere
conclusory statements in a complaint and "formulaic recitation[s]
of the elements of a cause of action" are not sufficient to withstand
a motion under Rule 12(b)(6). Id. (quoting Twombly, 550 U.S. at
555).

'The cited letter (admitted as Government Ex. 2475 in the Rajaratnam criminal trial) says in fact
(emphasis added): "This is to inform you that Rajat Gupta's balance in Voyager Capital
Partners, Ltd. was $16,406,974 as of December 31, 2007. Through June 30, 2008, the Fund was
relatively unchanged before any expenses."
4

Jewel Source, Inc. v. Primus Jewelers, LLC, No. 11 Civ, 3941(JSR), 2011 WL 4634019, at *1
(S.D.N.Y. Oct. 3, 2011). "[W]hen the allegations in a complaint, however true, could not raise a
claim of entitlement to relief, this basic deficiency should . . . be exposed at the point of
minimum expenditure of time and money by the parties and the court." Roth v. Jennings, 489
F.3d 499, 517 (2d Cir. 2007) (affirming dismissal of 16(b) claim against defendant EMR)
(internal quotation marks and citations omitted).
A.

Section 16(b) Is To Be Narrowly Construed
Section 16(b) imposes strict liability on officers, directors, and ten percent owners

for any profits realized by them on a "short-swing transaction" (i.e., any purchase and sale, or
sale and purchase, of their company's equity securities within less than six months). 15 U.S.C. §
78p(b). The intent of § 16(b) is to deter insiders from using confidential information about their
companies for personal trading gain by eliminating the profit from short-swing transactions. See
Allaire Corp. v. Okumus, 433 F.3d 248, 251 (2d Cir. 2006). Because it imposes strict liability,
§ 16(b) should be construed narrowly. See Foremost-McKesson Inc. v. Provident Secs. Co., 423
U.S. 232, 252 (1976); see also Magma Power Co. v. Dow Chemical Co., 136 F.3d 316, 320-21
(2d Cir. 1998) ("Section 16(b) operates mechanically, and makes no moral distinctions,
penalizing technical violators of pure heart, and bypassing corrupt insiders who skirt the letter of
the prohibition." The statute "imposes liability without fault . . within its narrowly drawn
limits.").
Section 16(b) requires a plaintiff to plead four elements: "(1) a purchase and (2) a
sale of securities (3) by an officer or director of the issuer or by a shareholder who owns more
than ten percent of any one class of the issuer's securities (4) within a six-month period."
Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d 305, 308 (2d Cir. 1998). A plaintiff must

5

demonstrate that an insider profited from a purchase and sale, or a sale and a purchase, within six
months of each other. 15 U.S.C. § 78p(b).
As described below, although the Complaint alleges tipping by Mr. Gupta to Mr.
Rajaratnam (which, by itself, does not state a § 16(b) claim), the Complaint fails to plead:
(1) that Mr. Gupta was a beneficial owner of the Goldman Sachs shares traded by the Galleon
Tech funds, and (2) that Mr. Gupta profited from the short-swing transactions by the Galleon
Tech funds.
13.

Section 16(b) Does Not Cover Tipper Tippee Claims
-

Section 16(b) is not coextensive with § 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder, the latter being a primary basis for the SEC's claims against Mr. Gupta.
While the anti-fraud sections are "broad remedial provisions aimed at reaching misleading or
deceptive activities," In re Cady, Roberts & Co., No. 8-3925, 1961 WL 60638, at *3 (S.E.C.
Nov. 8, 1961), § 16(b) "imposes liability without fault within its narrowly drawn limits."

Foremost McKesson, Inc., 423 U.S. at 251. As noted, § 16(b) was crafted narrowly, and
-

"Congress . . . left some problems of the abuse of inside information to other remedies." Id. at
255. Indeed, the Supreme Court has stated that, because "Rule 10b-5 has been held to embrace
evils . . . . [including] liability of insiders who improperly 'tip' others," § 16(b) is not
"necessary" to protect companies from such conduct. See id at 255 n.29 (internal citations
omitted).
Mr. Mercer asks the Court to expand the reach of § 16(b) beyond this intended
scope by incorporating a basis for disgorgement rejected by Congress. See Blau, 368 U.S. at
411-12 ("One may agree that petitioner and the Commission present persuasive policy arguments
. . . [b]ut this very broadening of the categories of person on whom these liabilities are imposed
by the language of 16(b) was considered and rejected by Congress when it passed the Act.").
6

Drafts of the legislation that became § 16(b) would have made it impermissible for an insider
"No disclose . . . any confidential information regarding or affecting any such registered security
not necessary or proper to be disclosed as part of his corporate duties," and required the "profit
made by any person, to whom such unlawful disclosure shall have been made in respect of any
transaction or transactions in such registered security" to be recoverable by the issuer. S. 2369,
73d Cong. § 15(b)(3) (1934). Congress decided not to enact this language.
In hearings, the proposed language was said to "affectO the friends to whom . . .
directors . . . pass on a tip . . . , and through whom they may conceal their own operations, since
the friend may be simply acting as an agent through whom the director.. . . effects the transaction
for his own benefit." Securities and Exchange Act of 1934: Hearings before the Committee on
Banking and Currency on S. Res. 84, S. Res. 56 and S. Res. 97 Before the S. Committee on
Banking and Currency, 73d Cong. 6560 (statement of Thomas G. Corcoran, Office of Counsel,
Reconstruction Finance Corp.). The legislative history shows that absent the proposed language
ultimately not adopted, the profits of a tippee are not recoverable from the tippee or the tipper.
Congress omitted the "tipping" provision, because legislators believed it would be difficult to
administer. Blau, 368 U.S. at 412 n.12. Congress chose to enact a "relatively arbitrary rule
capable of easy administration" that would "tak[e] the profits out of a class of trwasactions in
which the possibility of abuse was believed to be intolerably great." Reliance Elec. Co v.
Emerson Elec. Co., 404 U.S. 418, 422 (1972) (citation omitted). 3

Mr. Gupta is not contending that § 16(b) can be avoided simply by having the insider give
information to a nominee who would make short-swing trades at the direction, and for the
benefit, of the insider. He is contending that tipping information does not, per force, violate
§ I6(b).
7

C.

The Complaint Does Not Adequately Plead That Mr. Gupta Was
The Beneficial Owner Of The Subject Securities Or That Mr. Gupta
Profited From Short-Swing Transactions
Turning to the language that Congress did adopt, § 16(b) permits recovery only of

profits realized by the defendant-insider. 15 U.S.C. § 78p(b) (allowing recovery of profits
"realized by [the insider] from any purchase and sale, or any sale and purchase," of securities of
which the insider is the beneficial owner). See also Roth, 489 F.3d at 516 ("Section 16(b)
requires an insider to disgorge 'any profit realized by him' from short-swing transactions.")
(quoting Blau, 368 U.S. at 417).
Implicit in the term "profits" is the notion that the profits must be tangible, i.e.
readily reducible to monetary value. See Romeo & Dye, § III.G at 508 ("Where the benefits are
intangible and cannot be defined in monetary terms . . . there is no recoverable profit under
Section 16(b)."); see also S & S Realty Corp. v. Kleer-Vu Indus., Ine., 575 F.2d 1040, 1044 (2d
Cir. 1978) ("The language of the statute—`any profit realized . . . shall inure to and be
recoverable by the issuer . . .'—underscores this understanding of the term. The word 'realized'
also connotes gain. The word 'recoverable' implies the existence of a tangible asset or a fund.").
A complaint that does not specifically allege that the defendant-insider realized a profit on a
short-swing transaction in securities of which he was the beneficial owner must be dismissed.
See Roth, 489 F.3d at 516-17. See also Strauss ex rel. GSI Commerce, Inc. v. Comcast Corp.,
No. 03 Civ. 9795 (NRB), 2004 WL 1846301, at *3-4 (S.D.N.Y. Aug. 17, 2004), aff'd, 149 F.
App'x 15 (2d Cir. 2005).
The Complaint fails adequately to plead that Mr. Gupta was a beneficial owner of
the Goldman Sachs shares traded by the Galleon Tech funds for short-swing profits. "Beneficial
ownership" under § 16 requires a 2-prong analysis: The inquiry begins with an application of the
definition of beneficial ownership to determine insider status; once insider status is determined,
8

the second-tier analysis, or "pecuniary interest" test provided by Rule 16a-1(a)(2), 17 C.F.R. §
240.16a-1(a)(2), comes into play. For purposes of § 16(b) liability, a beneficial owner is "any
person who, directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise, has or shares a direct or indirect pecuniary interest in the equity
securities." 17 C.F.R. § 240.16a-1(a)(2). Pecuniary interest is defined as "the opportunity,
directly or indirectly, to profit or share in any profit derived from a transaction in the subject
securities." 17 C.F.R. § 240.16a-1(a)(2)(i).
It is undisputed that Mr. Gupta, as a director, was a statutory insider of Goldman
Sachs. But that is only the first step in the two-prong analysis. Without a showing of a
defendant's pecuniary interest in the subject shares, a complaint cannot survive a motion to
dismiss. See Roth, 489 F.3d at 516-17.
The Second Circuit has held that an insider's "business dealings" with another
person who realized short-swing profits, or even allegations of presumably improved business
prospects related to another's realization of short-swing profits, do not constitute a pecuniary
interest for the insider. In Roth, the court affirmed the district court's dismissal of the plaintiffs
§ 16(b) claim against EMR, a privately owned company alleged to have profited from shortswing transactions in MMI, of which EMR owned 14.8% of the common stock. The court
dismissed the claim against EMR on the ground that the complaint did not allege either that
EMR had itself engaged in any short-swing transactions in MMI securities, or that EMR had
shared, directly or indirectly, any profit from the sale of shares of MMI by Jennings, another
statutory insider and co-defendant. The failure to adequately allege EMR's pecuniary interest in,
and thus its beneficial ownership of, the subject securities required dismissal of the complaint.

9

The Second Circuit focused in particular on the requirement of § 16(b) that an
insider disgorge "any profit realized by him." Id. at 506 (citing Blau, 368 U.S. at 414). Although
Roth conceded on appeal that his complaint did not specifically allege that EMR had a pecuniary
interest in any of Jennings' profits, he argued that the highly unusual transaction by which EMR
financed co-defendant Jennings' trades in MIVII stock, followed by a merger offer, certainly gave
rise to a presumption that EMR derived "some pecuniary benefit" from Jennings' purchases and
sales. But the court disagreed, noting that lilt may well be that EMR improved its prospects for
an eventual merger by funding Jennings's purchases of MMI shares. But what is required for the
imposition of strict liability on EMR is that EMR itself have realized profits from short-swing
transactions." Roth, 489 F.3d at 516. The court explained, "[w]hen the allegations in a
complaint, however true, could not raise a claim of entitlement to relief, this basic deficiency
should . . . be exposed at the point of minimum expenditure of time and money by the parties and
the court," and held that the failure to allege that EMR received a pecuniary benefit from the
purchase/sale of Jennings' stock was fatal. Id. at 517 (citing Twombly, 127 S. Ct. at 1966).
Simply parroting the OIP, the Complaint alleges that Mr. Gupta "stood to benefit
from his relationship with Rajaratnam" because he "had a variety of business dealings with
Rajaratnam." (Compl.

¶ 43). The Complaint also borrows the OIP' s allegation that "Gupta was

an investor in, and a director of, Galleon's GB Voyager Multi-Strategy Fund SPC, Ltd., a master
fund with assets that were invested in numerous Galleon hedge funds, including those that
traded based on Gupta's illegal tips." (Compl.

I 43) (emphasis in original). At most, these

allegations broadly indicate that Mr. Gupta had business dealings with Mr. Rajaratnam, and an
attenuated connection to the Galleon Tech funds. These allegations do not indicate, in any way,

how Mr. Gupta beneficially owned the Goldman Sachs securities purchased and sold by the
Galleon Tech funds.
In a circular and conclusory manner—and without any specific factual
allegations—the Complaint plucks catchphrases and other terms of art from § 16(b)'s statutory
framework. But such conclusory allegations do nothing to advance the claim that Mr. Gupta was
a beneficial owner of the securities traded by the Galleon Tech funds. For example, the
Complaint alleges: "Mr. Rajaratnam/Galleon engaged in short-swing trading . . . of Goldman
Sachs securities, which generated substantial profits. Mr. Gupta was beneficial owner of these
[Goldman Sachs] securities because he had a pecuniary interest in the profits generated by this
trading activity." (Compl. ¶ 16). The Complaint repeatedly advances the conclusory allegation
about Mr. Gupta's interest in the subject securities, stating three times that "Mr. Gupta had or
shared influence and control over the Galleon Tech funds' short-swing trading in these Goldman
Sachs securities, because Mr. Gupta knew, and intended, that his disclosure of this material,
nonpublic information to Mr. Rajaratnam would trigger the short-swing trading activity
described." (Compl.

TT 27, 35, 40).

These statements do not allege facts sufficient to state a claim for relief plausible
on its face. Merely alleging that Mr. Gupta knew that information he had would trigger Mr.
Rajaratnam's short-swing trading activity does not lead to any inference that Mr. Gupta
beneficially owned the Galleon Tech funds' shares, or that he profited from the Galleon Tech
funds' short-swing trading in the shares.
Failing to allege that Mr. Gupta was the beneficial owner of the securities traded
by the Galleon Tech funds, the Complaint also fails sufficiently to plead that Mr. Gupta
"realized" any "profit"—as used in § 16(b)—from these transactions. For the most part, the

Complaint speculates that Mr. Gupta received intangible benefits through enhanced business
dealings with Mr. Rajaratnam, but these alleged benefits are not cognizable under § 16(b).
Beyond that, the Complaint can only speculate that Mr. Gupta "directly profited from the shortswing transactions because Mr. Rajaratnam undoubtedly paid Mr. Gupta for his inside
information" (Compl.

II 43), relying primarily on Mr. Rajaratnam's alleged payments to a

different individual, Anil Kumar. (See Compl.

in 44-46). The Complaint gets closer to a specific

allegation that Mr. Gupta realized profits when it supposes that Mr. Rajaratnam overstated the
value of Mr. Gupta's balance in the Voyager fund, but the attempt to portray Mr. Gupta's
balance amount as part of a quid pro quo relationship with Mr. Rajaratnam, or to tie it to the
Galleon Tech funds' short-swing profits in Goldman Sachs stock, is purely speculative. There is
simply no plausible basis for the Complaint to link Mr. Gupta's balance in the Voyager fund as
of December 31, 2007 (reading the actual text of the letter) with the Galleon Tech funds' shortswing profits realized months later.
D.

The Safe Harbor Exemption Precludes Liability
Even if the Complaint provided facts to sufficiently allege that Mr. Gupta

beneficially owned and profited from the shares in question (which it does not), the Rule 16a1(a)(2)(iii) safe harbor would preclude Mr. Gupta from § 16(b) liability. The safe harbor
exemption may be raised affirmatively on a motion to dismiss. The Second Circuit has enforced
affirmative defenses in Rule 12(b)(6) motions, so long as the defense appears on the face of the
complaint. See Official Comm. of the Unsecured Creditors of Color Tile, Inc. v. Coopers &

Lybrand, LLP, 322 F.3d 147, 158 (2d Cir. 2003).
The safe harbor provision recognizes that "attributing a corporation's transactions
in portfolio securities to all shareholders would clearly cast [Section 16's] net too wide." Feder

v. Frost, 220 F.3d 29, 34 (2d Cir. 2000). The Rule 16a-1(a)(2)(iii) safe harbor provides that:
- 12 -

A shareholder shall not be deemed to have a pecuniary interest in
the portfolio securities held by a corporation or similar entity in
which the person owns securities [and thus is not a "beneficial
owner" of such securities under Rule 16a-1(a)(2)] if the shareholder is not a controlling shareholder of the entity and does not
have or share investment control over the entity's portfolio.
For the purposes of this safe harbor exemption, the SEC has stated that the tem' "controlling
shareholder" refers only to a shareholder with "the power to exercise control over the corporation
by virtue of his or her securities holdings." Feder, 220 F.3d at 34 (citing Exchange Act Release
No, 34,28869, 56 Fed. Reg. at 7245 n.49).
Mr. Gupta was allegedly an indirect minority shareholder in GB Voyager MultiStrategy Fund SPC, Ltd., a portion of whose assets were invested in certain Galleon funds. Yet
the Galleon funds were, in turn, widely held funds with assets in the billions of dollars. Mr.
Gupta plainly was not a "controlling shareholder" of the Galleon funds, nor did he have or share
investment control over their portfolio. In fact, Mr. Gupta's actual interest in the subject trades,
given the size of the Galleon funds, was modest at best.
In Feder, the Second Circuit could not determine on appeal from a motion to
dismiss whether defendants had "working control" over an investment portfolio without
considering a relevant shareholders agreement, which plaintiffs had alleged established the
requisite control. Id. at 35. Unlike Feder, the Complaint here does not leave open the question of
whether Mr. Gupta had working control over the Galleon Tech funds' portfolios, because the
Complaint does not—and could not—allege that Mr. Gupta had or shared investment control
over the Galleon Tech funds' holdings.
In light of the safe harbor provided by Rule 16a-1(a)(2)(iii), the Complaint rings
hollow when it alleges that Mr. Gupta realized short-swing profits from the sale of shares by
Galleon Tech funds. The disconnect between Section 16's scope and the Complaint is exposed

by the allegation that Mr. Gupta failed to file reports under Section 16(a) specifying, among
other items, "the dates of the reported short-swing trades" and "the amounts, prices, and nature
of the securities acquired, disposed of, or beneficially owned." (Compl. ¶ 11, citing 15 U.S.C.
§ 78 p(a)). The Complaint never alleges that Mr. Gupta played any role in determining, for
example, the amount of shares purchased or sold by the Galleon Tech funds or the timing of
both a purchase and a sale by the Galleon Tech funds giving rise to a short-swing profit. Indeed,
the Complaint does not even allege that Mr. Gupta knew the details of the Galleon Tech funds'
trading in Goldman Sachs stock sufficient to file reports under § 16(a). Quite simply, it was
never intended under Section 16 that a person in Mr. Gupta's position Would file such reports, as
it was never intended that a person in his position would be subject to liability for the trades
alleged.
CONCLUSION
For the foregoing reasons, Mr. Gupta's motion to dismiss should be granted and
the Complaint should be dismissed with prejudice.
Dated: New York, New York
November 23, 2011

Respectfully submitted,
KRAMER LEVIN NAFTALIS & FRANKEL LLP

By:

/s/ Gary P. Naftalis
Gary P. Naftalis
Michael S. Obeiinan
1177 Avenue of the Americas
New York, New York 10036
[phone] (phone)
[phone] (fax)
[e-mail]
[e-mail]

Attorneys for Defendant Rajat K Gupta

KU 2854217:I

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