Treble the profit from Rajaratnam’s violation was an appropriate measure because the Exchange Act allows such calculation without reference to a defendant’s personal gain. Wealth also was a relevant factor in fixing the amount of Rajaratnam’s civil penalty.
A Second Circuit panel upheld the district court’s imposition of a more than $92.8 million civil penalty on Raj Rajaratnam in the SEC’s civil insider trading case against the former managing general partner of Galleon Management, LP. Rajaratnam had appealed the civil penalty portion of the case on the grounds that the district court incorrectly looked beyond his personal gain to the totality of the profits from the violation and that the district court also failed to consider penalties imposed on Rajaratnam in a parallel criminal case. Ultimately, the panel decided that the Exchange Act permits courts to look to the "violation" instead of just the defendant’s personal gain and that the district court’s imposition of the maximum permitted civil penalty was not an abuse of discretion (SEC v. Rajaratnam, March 5, 2019, Lynch, G.).
Treble the gain; Contorinis inapt. Exchange Act Section 21A provides, in part, that the SEC: (1) "May bring an action in a United States district court to seek, and the court shall have jurisdiction to impose, a civil penalty to be paid by the person who committed such violation;" and that (2) "The amount of the penalty which may be imposed on the person who committed such violation shall be determined by the court in light of the facts and circumstances, but shall not exceed three times the profit gained or loss avoided as a result of such unlawful purchase, sale, or communication" (See Exchange Act Sections 21A(a)(1) and (a)(2)).
The panel emphasized that the statute focuses on the "violation" and not on the defendant’s personal gain or losses avoided. The panel explained that Congress is presumed to know what language it is using and that a focus on the "violation" in this instance would make sense based on a "plain reading" of the statute as well as based on the ability of Congress to state otherwise in different sections of the same statute (e.g., by using the phrase "such defendant" to refer specifically to a defendant; the court cited numerous examples from the securities laws, but for an example within the Exchange Act, see Section 21(d)(3)(B)(i), (ii), (iii) referring to "pecuniary gain to such defendant"). As a result, reading Sections 21A(a)(1) and (a)(2) together, a civil penalty can be based on a third party’s gain/losses avoided with respect to a defendant’s violation. A footnote to the opinion also cited the House Report accompanying the legislation that enacted Section 21A as supporting the panel’s view.
Rajaratnam had argued that Section 21A should be limited to the violator’s personal profit. According to Rajaratnam, that would result in a base amount of $4.7 million, instead of a combined base amount of more than $30 million in profits that were directed to both Rajaratnam’s and another person’s accounts. Assuming the imposition of the maximum civil penalty (treble the gain/loss avoided), the amount under Rajaratnam’s theory would have been $14.1 million versus the $92.8 million imposed by the district court.
The panel also distinguished the Second Circuit’s decision in Contorinis via a lengthy footnote. Rajaratnam had argued that Contorinis, which held that a forfeiture statute which did not identify whom must acquire profits could not apply to profits that a defendant neither received nor possessed, should inform the panel’s view of Section 21A and, thus, result in a civil penalty based on only $4.7 million, the amount of profits Rajaratnam personally received. The panel, however, cited its prior summary order denying Rajaratnam’s request for coram nobis (writ of error) relief in Rajaratnam’s criminal case for the conclusion that Rajaratnam controlled Galleon’s distributions and, thus, he would have controlled the proceeds of his scheme. In Contorinis, by contrast, the defendant lacked control over the fund that received the illicit proceeds. As a result, Rajaratnam could not benefit from a comparison of the forfeiture statute to Section 21A in the civil case.
The wealth factor. Courts within the Second Circuit’s ambit apply many factors in fixing civil penalties under Exchange Act Section 21A but, according to the panel, there is no rule against examining a defendant’s wealth (but the court later observed that a court’s bias against the wealthy could be problematic) and the five factors most often cited by courts are neither "exhaustive" nor "talismanic." Moreover, the panel said the First, Seventh, and Eleventh Circuits also consider a defendant’s wealth.
Rajaratnam had argued that only one of the factors used by courts within the Second Circuit referenced wealth and that factor emphasized reducing the penalty, not increasing it, because of the "defendant’s demonstrated current and future financial condition." But the panel suggested that wealth is relevant because wealth is imbued with a kind of relativity or scalability. Said the panel: "A fine that would be significantly painful to a person of modest means might be a mere slap on the wrist or ‘cost of doing business’ to a wealthier offender." The court explained that the several factors, wealth included, are designed to produce a civil penalty that can deter misconduct. On a related point, the court also rejected Rajaratnam’s assertion that the district court’s language about "depriv[ing] this defendant of a material part of his fortune" was best understood in the context of the district court’s discussion of Rajaratnam’s "brazenness" and the "scope" and "duration" of Rajaratnam’s insider trading.
Lastly, the panel rejected Rajaratnam’s argument that the district court ignored the criminal penalties imposed on Rajaratnam (11 years in prison, a $10 million criminal fine, and a $53.8 million forfeiture order). In essence, Rajaratnam was asking that the civil penalty be offset by the criminal penalties. However, the panel noted the wide discretion afforded the district court by Section 21A ("The amount of the penalty…shall be determined by the court in light of the facts and circumstances…") to impose a civil penalty of up to treble the gain or losses avoided. The court further observed that Section 21A also states that the civil penalties it authorizes are "in addition to" other actions that may be brought by the Commission or the attorney general.
The case is No. 11-5124-cv.
Attorneys: David Lisitza for the SEC. Samidh Guha (Jones Day) for Raj Rajaratnam, Galleon Management, LP, Far & Lee LLC and Spherix Capital LLC.
Companies: Galleon Management, LP; Far & Lee LLC; Spherix Capital LLC
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