Rajaratnam ordered to pay $92.8 million in SEC case

Date: Wednesday, November 9, 2011
Author: Jonathan Stempel and Grant McCool

(Reuters) - A federal judge ordered Raj Rajaratnam, the Galleon Group hedge fund founder sentenced to 11 years in prison for insider trading, to pay a record $92.8 million penalty in a related Securities and Exchange Commission civil case.

The penalty imposed by U.S. District Judge Jed Rakoff in Manhattan is in addition to the $63.8 million that Rajaratnam's lawyers said their client has already paid in his criminal case, including $53.8 million that was forfeited and a $10 million fine.

A federal jury in May convicted Rajaratnam of 14 counts of securities fraud and conspiracy in the criminal case.

Rakoff's colleague, U.S. District Judge Richard Holwell, last month imposed the 11-year prison term, the longest recorded U.S. sentence for insider trading. Rajaratnam is scheduled to begin his term on December 5.

The SEC said Rajaratnam's civil penalty is the largest against an individual in an insider trading case brought by the regulator, including in its 1980s cases against stock trader Ivan Boesky and junk bond financier Michael Milken.

Rakoff said a severe civil penalty for Rajaratnam was needed to make clear that insider trading should be "a money-losing proposition" for all who consider it.

He also said such a penalty was appropriate because the net worth of Rajaratnam, a former billionaire, "considerably exceeds" the penalties in the criminal case.

"When to this is added the huge and brazen nature of Rajaratnam's insider trading scheme, which, even by his own estimate, netted tens of millions of dollars and continued for years, this case cries out for the kind of civil penalty that will deprive this defendant of a material part of his fortune," Rakoff wrote.

Akin Gump Strauss Hauer & Feld, the law firm representing Rajaratnam, declined to comment, a spokeswoman said.

LARGEST INSIDER TRADING PENALTY

SEC enforcement chief Robert Khuzami in a statement said the penalty "reflects the historic proportions of Raj Rajaratnam's illegal conduct and its impact on the integrity of our markets."

Boesky in 1986 agreed to a $50 million civil penalty and give up $50 million of illegal profit to settle with the SEC, while four years later Milken gave up $400 million of illegal profit. Milken also accepted a $200 million criminal fine.

Rakoff said he arrived at Rajaratnam's penalty by tripling a "base figure" for ill-gotten gains or avoided losses by Rajaratnam from alleged insider trading in shares of Intel Corp (INTC.O), Akamai Technologies Inc (AKAM.O), ATI Technologies Inc, Clearwire Corp (CLWR.O) and PeopleSupport Inc.

While Rakoff chose Rajaratnam's $30.9 million estimate for the base figure rather than a higher sum proposed by the SEC, he said even the lower base figure would "still fulfill all the purposes of a civil penalty in this case."

The SEC had sought a $96.4 million civil penalty, a lawyer for the regulator said at an October 28 hearing. Galleon settled with the SEC last month.

Last month, prosecutors and the SEC filed charges against Rajat Gupta, a former Goldman Sachs Group Inc (GS.N) director and global head of the McKinsey & Co consulting firm, for allegedly providing Rajaratnam with some of his tips. Gupta pleaded not guilty in the criminal case.

The case is SEC v. Galleon Management et al, U.S. District Court, Southern District of New York, No. 09-08811.