In SEC v. Gowrish, No. 11–16956, 2013 WL 681053 (9th Cir. Feb. 26, 2013), the Ninth Circuit Court of Appeals affirmed a civil judgment against former TPG Capital, LP associate, Vinayak Gowrish, for violations of Section 10(b) of the Securities and Exchange Act and Rule 10b–5.
The Securities and Exchange Commission’s (“SEC”) case against Vinayak Gowrish (“Defendant”) revolved around the Defendant’s connection with three parties: Adnan Zaman, former vice president at Lazard Freres & Co.; Pascal Vaghar; and Sameer Khoury.
The SEC alleged that the Defendant tipped inside information to Zaman concerning three likely acquisitions. Zaman allegedly relayed that information to both Vaghar and Khoury, who traded on the tip. The SEC initiated a civil prosecution against the Defendant for violations of Section 10(b) of the Securities and Exchange Act and Rule 10b–5.
A jury returned a verdict against the Defendant on three counts of insider trading. The district court ordered: (i) the permanent enjoinment by the Defendant from further violation of Section 10(b) of the Securities and Exchange Act and Rule 10b–5; (ii) the disgorgement of $12,000, plus prejudgment interest; and (iii) the imposition of a $100,000 civil penalty. The Defendant appealed to the Ninth Circuit.
First, the Defendant averred that due process demanded a new trial because “(1) he was denied access to the medical file of an SEC witness, Pascal Vaghar; (2) the SEC elicited impermissible testimony from another witness, Adnan Zaman; and (3) the SEC vouched for Vaghar during closing arguments.”
The Defendant sought access to Vaghar’s medical file in order to challenge Vaghar’s testimony at trial, alleging that he suffered from memory loss due to a traumatic brain injury. The district court denied the discovery request, noting that it was untimely. The Ninth Circuit, reviewing the denial for an abuse of discretion, held that the Defendant provided no excuse for failing to meet the discovery deadline, and therefore, no abuse of discretion existed. As for the Defendants remaining two due process assertions, the Ninth Circuit held that the Defendant failed to establish any showing of plain error.
Second, the Defendant argued that the district court erroneously instructed the jury that a showing of “recklessness” was sufficient for finding scienter. The Ninth Circuit in dismissing the argument noted that the law was well settled that recklessness was sufficient for Section 10(b) violations. Moreover, the result did not change just because this case involved Rule 10b–5(a) and (c), rather than Rule 10b–5(b).
Third, the Defendant claimed that the district court’s remedy was improper on two fronts. The district court improperly enjoined future violations of Section 10(b) and violated Defendant’s Seventh Amendment rights by looking at facts beyond those found by the jury in imposing the $100,000 civil penalty.
As for enjoining future violations, the Ninth Circuit explained that the district court property looked to the Fehn five-factor test. To overcome application of the test, the Defendant was required to show that application of the test was “illogical, implausible, or without support in inferences that may be drawn from facts in the record.” The Ninth Circuit concluded that the Defendant had not met this standard.
Addressing the Defendant’s Seventh Amendment argument, the Ninth Circuit characterized the argument as consistent with the position that fines could only be imposed based upon facts found by the jury. Existing precedent, however, had held that the “Seventh Amendment right to a jury trial does not extend to the determination of facts necessary to support a civil fine in a government enforcement action.” The court noted that the decision, while having “potential vulnerability . . . remains the law and controls in this case.” In any event, the Ninth Circuit found that any error was “harmless.”
The primary materials for this case may be found on the DU Corporate Governance website.