In SEC v. Rajaratnam, No. 1:09-cv-8811-JSR (S.D.N.Y. Nov. 8, 2011), the court granted the Securities and Exchange Commission’s (“SEC”) motion for summary judgment against the defendant for insider trading 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.
The SEC sought “disgorgement, prejudgment interest, injunctive relief, and civil penalties” as the result of the defendant’s alleged insider trading on shares of Intel Corp., Clearwire Corp., Akami Technologies, Inc., and PeopleSupport, Inc. In the parallel criminal case, the judge sentenced the defendant to 11 years in prison, forfeiture of $53.8 million, and $10 million in criminal penalties. The defendant conceded that based on the criminal conviction, “he was collaterally estopped from contesting liability for insider trading.” In turn, the SEC conceded that its request for $31.6 million in disgorgement was rendered moot by the criminal sentence. Based on the parties’ concessions, the only remaining issue for the court was whether civil penalties should be imposed and in what amount.
District courts are authorized to assess civil penalties against inside traders under Section 21A of the Exchange Act. To determine the amount of the penalty, the courts typically consider “‘(1) the egregiousness of the defendant’s conduct; (2) the degree of the defendant’s scienter; (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 be reduced due to the defendant’s demonstrated current and future financial condition’.” In this instance, the court also considered the penalty assessed in the criminal action. Whereas criminal punishment focuses on compensating the victims and the defendant disgorging ill-gotten profits, civil penalties are imposed to make insider trading a “‘money-losing proposition . . . [and show that inside traders] are going to pay severely in monetary terms.”
The court determined that civil penalties were necessary based on the defendant’s high net worth and the “huge and brazen nature” of the insider trading scheme. Although the court agreed that treble damages were appropriate in this instance, the court still had to determine what was the “‘profit gained and loss avoided’.” The defendant argued that his profit gained or loss avoided should only be the amount directly connected to his use of insider information. However, the court used Congress’ definition of “profit gained” or “loss avoided” which is the difference between the trading price “at a ‘reasonable period after public dissemination of the nonpublic information’” and the price paid by the defendant.
The SEC and the defendant agreed that within 24-hours of the announcement was a reasonable period of time, but arrived at a base figure for the penalty of $33,512,929 and $30,935,235 respectively. The court held that despite the difference in the penalty calculated by the SEC and the defendant, trebling of the defendant’s calculation for a civil penalty of $92,805,705 would “still fulfill all the purposes of a civil penalty.” In addition to the criminal penalties previously imposed, the court imposed a civil penalty of $92,805,705 and permanently enjoyed the defendant from violating the insider trading laws under the Exchange Act and Securities Act.
The primary materials for this case may be found at the DU Corporate Governance website.