US hedge fund founder ordered to pay record penalty for insider trading

[JURIST] The US District Court for the Southern District of New York [official website] Tuesday ordered Galleon Group hedge fund founder Raj Rajaratnam [WSJ archive] to pay an unprecedented civil penalty for insider trading. In a thorough analysis of the appropriate amount of the fine, Judge Jed Rakoff handed down a $92.8 million penalty [opinion, PDF] in the culmination of a civil lawsuit against Rajaratnam brought by the Securities and Exchange Commission (SEC) [official website]. The penalty is the largest fine ever imposed on an individual in an SEC insider trading case. Rakoff summarized the state of the law:

SEC civil penalties, most especially in a case involving such lucrative 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."
By statute the court is empowered to "impose a penalty of up to, but no more than, 'three times the profit gained or the loss avoided.'" Rakoff reasoned that Rajaratnam's fortune was considerably more than the fines imposed on him as a result of his criminal convictions and felt the punishment should be relative the the one-time billionaire's net-worth, intentionally depriving Rajaratnam of a "material part of his fortune." Rajaratnam has already been ordered to pay a $10 million fine and forfeit $53.8 million in profits since he was convicted [JURIST report] of insider trading in May.

Rajaratnam was sentenced to 11 years in prison [JURIST report] last month after he was convicted of orchestrating the largest insider trading case in US history. The jury found him guilty of nine counts of securities fraud and five counts of conspiracy to commit securities fraud, and others have been implicated in the insider trading scheme with Rajaratnam. Danielle Chiesi pleaded guilty in January and settled with the SEC [JURIST reports] in July. Former IBM senior vice president Robert Moffat was sentenced to six months in prison last September and was ordered to pay a $50,000 fine for his role in the scheme after pleading guilty [JURIST reports] in March 2010. Former Intel Capital executive Rajiv Goel pleaded guilty [JURIST report] to insider trading charges in February 2010. Rajaratnam, Chiesi, Goel and Moffat were arrested in October 2009 and charged [complaint, PDF] along with two other individuals and two business entities. The complaint alleged that the individuals provided Galleon Group and another hedge fund with material nonpublic information about several corporations upon which the funds traded, generating $25 million in illicit gain.

 

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