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SEC obtains record USD92.8m penalty against Raj Rajaratnam

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The Securities and Exchange Commission has obtained a record financial penalty of more than USD92.8 million against billionaire hedge fund manager Raj Rajaratnam for widespread insider trading.

The final judgment entered by the Honourable Jed S Rakoff of the US District Court for the Southern District of New York finds Rajaratnam liable for a civil monetary penalty of USD92,805,705, which marks the largest penalty ever assessed against an individual in an SEC insider trading case.

The SEC brought civil charges against Rajaratnam on 16 October, 2009, alleging that he and several others including his New York-based hedge fund advisory firm Galleon Management LP engaged in a massive insider trading scheme. The SEC subsequently amended its complaint in November 2009 and January 2010, adding several more defendants and alleging additional insider trading schemes that cumulatively generated more than USD52 million in illicit gains.

“The penalty imposed today reflects the historic proportions of Raj Rajaratnam’s illegal conduct and its impact on the integrity of our markets,” says Robert Khuzami, Director of the SEC’s Division of Enforcement.

The SEC’s enforcement action against Rajaratnam and Galleon was part of a larger insider trading probe that has resulted in civil charges against a total of 29 individuals and entities including hedge fund advisers, Wall Street professionals, and corporate insiders. The SEC alleged insider trading in the securities of more than 15 publicly traded companies for more than USD90 million in illicit profits or losses avoided.

In the parallel criminal case, the SEC provided significant assistance to the US Attorney’s Office for the Southern District of New York in its successful criminal prosecution of Rajaratnam, who was found guilty on 11 May, 2011, of all 14 counts charged, including five counts of conspiracy to commit securities fraud and nine counts of securities fraud. Following the jury verdict, Rajaratnam was sentenced to a term of imprisonment of 11 years, and was ordered to pay more than USD53.8 million in forfeiture of illicit gains and USD10 million in criminal fines.

The total amount of monetary sanctions imposed on Rajaratnam in the civil and criminal cases is more than USD156.6 million.

In addition to imposing a record penalty, today’s final judgment in the SEC’s civil action permanently enjoins Rajaratnam from future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5. The order further finds that Rajaratnam is liable for an unspecified amount of disgorgement and prejudgment interest, which are deemed satisfied by the forfeiture ordered against Rajaratnam in the criminal case.

Separately, on 27 October, 2011, the SEC obtained a final judgment by consent against Rajaratnam’s firm Galleon Management, permanently enjoining it from violating the antifraud provisions of the federal securities laws and holding it jointly and severally liable for the monetary relief ordered against Rajaratnam.

On 26 October, 2011, the SEC charged former McKinsey & Co. worldwide head Rajat K Gupta with insider trading for illegally tipping Rajaratnam while serving on the boards of Goldman Sachs and Procter & Gamble. The SEC also filed new insider trading charges against Rajaratnam alleging that he caused various Galleon funds to trade based on Gupta’s inside information, generating illicit profits or loss avoidance of more than USD23 million. This insider trading enforcement action against Rajaratnam remains pending before Judge Rakoff.

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