S.E.C. v. Rajaratnam

918 F.3d 36

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee,

v.Raj RAJARATNAM, Defendant-Appellant,Galleon Management, LP, Ali Hariri, Rajiv Goel, Anil Kumar, Danielle Cheisi, Mark Kurland, Robert Moffat, New Castle Funds LLC, Roomy Khan, Deep Shah, Ali T. Far, Choo-Beng Lee, Far & Lee LLC, Spherix Capital LLC, Zvi Goffer, David Plate, Gautham Shankar, Schottenfield Group LLC, Steven Fortuna, S2 Capital Management, LP, Defendants.

Docket No. 11-5124-cv

August Term, 2018

United States Court of Appeals, Second Circuit.

Argued: November 2, 2018

Decided: March 5, 2019

David Lisitza, Senior Litigation Counsel, Securities and Exchange Commission, Washington, D.C., (Michael A. Conley, Deputy General Counsel, Jacob H. Stillman, Solicitor, Randall W. Quinn, Assistant General Counsel, Paul G. Alvarez, Senior Counsel, Securities and Exchange Commission, Washington, D.C., on the brief ) for Plaintiff-Appellee.

Samidh Guha, Jones Day, New York, NY (Meir Feder, Ian Samuel, Jones Day, New York, NY, on the brief ) for Defendant-Appellant.

Before: Raggi, Lynch, and Droney, Circuit Judges

Gerard E. Lynch, Circuit Judge:

In this civil action, filed in the United States District Court for the Southern District of New York (Jed S. Rakoff, Judge ), the Securities and Exchange Commission ("SEC") charged defendant-appellant Raj Rajaratnam with insider trading conduct for which he was criminally prosecuted by the United States Department of Justice. See United States v. Rajaratnam , 09 Cr. 1184 (S.D.N.Y. Holwell, J .). After Rajaratnam’s conviction following trial, the SEC moved for summary judgment in the civil case. As part of its requested relief, the SEC sought a civil penalty pursuant to Securities Exchange Act Section 21A, 15 U.S.C. § 78u-1, which permits the district court to assess a penalty upon a person who engages in insider trading in an amount "not to exceed three times the profit gained or loss avoided as a result of such unlawful purchase, sale, or communication." Id . at (a)(2). After extensive argument regarding the appropriate amount of the penalty, the district court entered judgment against Rajaratnam, imposing a civil penalty of $92,805,705, the maximum permissible under the statute. Rajaratnam now challenges that award. For the reasons that follow, we AFFIRM the judgment of the district court.

BACKGROUND

Rajaratnam was the managing general partner and portfolio manager of Galleon Management, LP, a registered investment adviser, and its affiliated multi-billion dollar group of hedge funds (collectively, "Galleon"). In 2011, Rajaratnam was indicted in the Southern District of New York on nine counts of substantive securities fraud under Securities Act Section 17(a), Exchange Act Section 10(b), and Exchange Act Rule 10b-5, based on his insider trading in the stock of five different companies, and five counts of conspiracy to commit insider trading.

On the day that Rajaratnam was arrested, the SEC filed a parallel civil complaint, also in the Southern District of New York, charging Rajaratnam with the same insider trading conduct alleged in his criminal case. Specifically, the SEC alleged, among other things, that Rajaratnam’s purchases and sales of stock in certain companies on the basis of material nonpublic information violated Securities Act Section 17(a), 15 U.S.C. § 77q(a), Exchange Act Section 10(b), 15 U.S.C. § 78j(b), and Exchange Act Rule 10b-5, 18 C.F.R. § 240.10b-5. The SEC sought an injunction against further securities law violations, disgorgement of ill-gotten gains from the violations (plus prejudgment interest), and a civil monetary penalty under Exchange Act Section 21A, 15 U.S.C. § 78u-1 ("Section 21A").

Subsection (a)(1) of Section 21A authorizes the SEC to bring a civil action against a person who violates the insider trading laws. Subsection (a)(2) concomitantly authorizes the district court to impose a civil penalty "on the person who committed such violation" in an amount to be determined by the district court "in light of the facts and circumstances," but stipulates that such penalty "shall not exceed three times the profit gained or loss avoided as a result of such unlawful purchase, sale, or communication." The SEC’s case before Judge Rakoff proceeded on a track parallel to the criminal case, before then-Judge Holwell.

After an eight-week trial in the criminal case, a jury found Rajaratnam guilty on all counts charged.¹ Specifically, Rajaratnam was found to have executed trades in Galleon’s accounts and in the account of Rajiv Goel ("Goel"), an Intel executive who had provided tips to Rajaratnam, in the stock of five companies on the basis of inside information. The district court sentenced Rajaratnam to 132 months’ imprisonment and to a $10 million criminal fine. In a separate proceeding, before Judge Preska, the district court calculated Rajaratnam’s forfeiture under 18 U.S.C. § 981, and determined that the amount of the "profits gained (or losses avoided) in Galleon" accounts "as a result of" all of Rajaratnam’s offenses—both the substantive and conspiracy violations—was $53.8 million. Supp. App. at 303–04.

After Rajaratnam’s conviction, the SEC moved for partial summary judgment in the civil case on its claims of insider trading in the same five stocks that formed the factual basis for Rajaratnam’s criminal conviction.² Rajaratnam conceded that his criminal conviction for insider trading in these five stocks collaterally estopped him from contesting liability. Rajaratnam did not oppose entry of a permanent injunction prohibiting him from further violating the securities laws’ antifraud provisions. The SEC agreed that its demand for $31.6 million in disgorgement was moot in light of the $53.8 million forfeiture order. Thus, the only issues in dispute on summary judgment were the need for, and the amount of, the civil penalty.

The SEC sought the maximum treble penalty available under the statute. It argued that such a penalty was warranted because Rajaratnam orchestrated a multi-year campaign of insider trading, corrupted numerous corporate insiders, and had taken highly deliberate steps to evade detection. The SEC emphasized that the high-profile nature of this case would afford the district court "a truly unique opportunity to send as strong a message as possible to the investment community, and indeed the world, that insider trading and corruption in connection with this nation’s capital markets will not be tolerated." App. at 163.

In response, Rajaratnam argued that no civil penalty at all was warranted because of the punishment already meted out in his criminal case: 11 years’ imprisonment, the longest prison term ever imposed for insider trading, a criminal fine of $10 million, and a $53.8 million order of forfeiture. In the event that the district court did impose a civil penalty, Rajaratnam argued that the penalty should be calculated by reference only to the profits Rajaratnam personally received as a result of the conduct at issue. Those profits, approximately $4.7 million, came from Rajaratnam’s share of his management fees and returns on his personal investment in Galleon’s funds.

After hearing oral argument, the district court issued a written decision on the issue of Rajaratnam’s civil penalty. First, the district court accepted Rajaratnam’s calculation that the total profit gained and loss avoided by the illegal trades he executed in Galleon’s and Goel’s accounts on the basis of inside information was $30,935,235.³ The district court then trebled this number to impose a civil penalty of $92,805,705.

The district court concluded that the Section 21A(a)(2) penalty of "three times the profit gained or loss avoided" was not limited to Rajaratnam’s personal gains (of around $4.7 million) but, rather, extended to the amount resulting from the "illegal trades [Rajaratnam] executed." SEC v. Rajaratnam , 822 F.Supp.2d 432, 435 (S.D.N.Y. 2011). The district court reasoned that "nothing in the text of Section 21A" required that the civil penalty be based only on profits Rajaratnam "personally gained," that no case law supported limiting the civil penalty amount to personal gain, and that Rajaratnam’s reading would result in the "evasion, in effect, of defendant’s responsibility for the wrongdoing he committed." Id .

The district court then decided that imposing a civil penalty of three times the base amount of profit gained and loss avoided was warranted because "this case meets every factor favoring trebling": Rajaratnam’s violations were egregious; he acted with a high degree of scienter; his conduct created substantial losses to investors; his conduct continued for years; and he had the ability to pay a substantial penalty. Id. at 433–34. The district court concluded that "this case cries out for the kind of civil penalty that will deprive [Rajaratnam] of a material part of his fortune" given the "huge and brazen nature of Rajaratnam’s insider trading scheme, which, even by his own estimates, netted tens of millions of dollars and continued for years." Id . at 434.

The district court acknowledged that Rajaratnam had already been punished in the criminal case, and noted that penalties imposed on a defendant in a "parallel criminal action may ... be relevant" to the size of the civil penalty. Id . But the district court found that the maximum civil penalty was warranted despite Rajaratnam’s criminal sentence because the focus of criminal punishment is on moral blameworthiness, by contrast to SEC civil penalties, which are designed to effect general deterrence and to make insider trading a money-losing proposition.

Rajaratnam timely appealed from the district court’s final judgment.

DISCUSSION

Rajaratnam raises two arguments on appeal. First, he argues that the civil penalty for insider trading under Section 21A may not exceed three times his own profit gained or loss avoided. Second, he argues that the district court abused its discretion in imposing the maximum penalty under the statute,...