Record Penalty in Rajaratnam Case

The SEC obtained a record penalty from Raj Rajaratnam, the hedge fund manager recently convicted of insider trading.  The SEC obtained a penaly of $92.8 million.  The penalty is the largest against an individual. 

The penalty was imposed in an order granting the SEC summary judgment in its civil suit against Rajaratnam.  An injunction was a foregone conclusion.  Given his criminal conviction, Rajaratnam "conceded that, because of the criminal conviction, he was collaterally estopped from contesting liability for insider trading on the five stocks here in issue, and that he did not oppose having an injunction entered against him based on this liability." 

Moreover, given the $53.8 million forfeiture in the criminal case, the SEC conceded that its "request for $31.6 million in disgorgement was moot."

The only real issue was the amount of the penalty.  Defendant essentially argued that, given the $38 million penalty imposed in the criminal case, "further civil penalties are unwarranted."  Judge Rakoff, however, disagreed.  Criminal penalties, according to the judge, were designed to address defendant's "moral blameworthiness."  In contrast:

• SEC civil penalties, most especial in a case involving such lucrativeive misconduct as insider trading, are designed, most importantly, to make such unlawful trading "a money-losing proposition not just for this defendant, but for all who would consider it, by showing that if you get caught, you are going to pay severely in monetary terms.

In calculating the penalty, the court agreed that the facts justified the highest possible penalty of three times the profit gained or loss avoided.  Moreover, the court declined to reduce the penalty by amounts attributed not to insider trading but to the market.  As the court reasoned:

• By its plain language, Congress instructed the Court not to eliminate from the calculation of "profit gained" or "loss avoided" any amount attributable to market factors other than the defendant's inside information. Rather, once the Court identifies the trading price of the security at a "reasonable period after public dissemination of the nonpublic information," the Court should simply calculate the difference between that price and the price the defendant paid for that security in order to arrive at the profit gained or loss avoided.

The profits/losses did, however, have to be computed based upon the trading price of the relevant shares "a reasonable period after public dissemination of the nonpublic information."  15 USC 78u-1(f).  Using 24 hours as a reasonable period, the Commission computed the gain/loss avoided as $33,512,929, while defendant came up with $30,935,235. 

The court refused to resolve the discrepancy.  The court simply determined that anything over $90 million was enough and, as a result, accepted the defendant's calculation since it yielded the requisite minimum penalty.

• the Court determines that it need not resolve these somewhat technical differences, since for present purposes the Court can accept the lower figure and still fulfill all the purposes of a civil penalty this case. Specifically, the Court determines that these purposes can all be achieved by a trebling of the base figure as long as that trebling results in a fine amount of at least $90,000,000.

As for paying the $92,805,705, the court noted that certified check, bank cashier's check, or United States postal money order made payable to the United States Securities and Exchange Commission would be sufficient. 

We will have Judge Rakoff's order posted shortly on the DU Corporate Governance web site.