US regulator SEC has asked an appeals court to affirm a district court’s decision that India-born former Goldman Sachs director Rajat Gupta pay a USD 13.9 million penalty and be banned for life from serving as director of a public corporation.
The federal regulator has filed a brief in the US Court of Appeals for the Second Circuit, saying the district court acted well within its discretion by permanently barring Gupta from associating with brokers, dealers, and investment advisors, permanently enjoining him from future violations of the securities laws and permanently barring him from serving as an officer or director of a public company.
65-year-old Gupta has been granted time till April 7 to file his reply to the SEC brief.
Gupta had last year in November asked the appeals court to overturn the district court’s decision that ordered him to pay the USD 13.9 million penalty in the civil insider trading case filed against him by the SEC.
His lawyers had argued that the district court “abused” its discretion in imposing the statutory maximum civil penalty of USD 13.9 million, which is three times the USD 4.6 million in gains made by hedge-fund manager Raj Rajaratnam who traded on tips Gupta allegedly passed on to him.
The lawyers said the penalty was excessive in light of Gupta already facing a five million dollar fine and two year prison sentence in the criminal insider trading case.
The SEC said the district court was right in ordering that Gupta pay the maximum statutory civil penalty.
“Contrary to Gupta’s contentions, the district court did consider whether to reduce the civil penalty in light of penalties imposed in the prior criminal case, but exercised its discretion to decline such a reduction.”
SEC’s lawyers argued that “specifically, the court found that Gupta had violated the securities laws with a high degree of scienter, that his violations were egregious, repeated, and resulted, in effect, in millions of dollars of losses to those who traded their stock without the benefit of Gupta’s inside information, and that Gupta’s current financial condition does not counsel against the imposition of a civil penalty of the level that the SEC seeks.”
“The district court considered Gupta’s argu[ment] that a treble penalty is inappropriate in light of the criminal penalties already imposed but concluded that imposition of an additional civil penalty is called for here in order to effectuate Congress’s purpose of making insider trading a money-losing proposition, both for Gupta and for those who
would consider it,” the SEC said.
The SEC said imposing the maximum civil penalty is justified as it will ensure a “meaningful deterrent” effect given Gupta’s wealth, and the aggravating facts that his tipping arose from his role in the securities industry and resulted in substantial investor losses.”
The district court recognised that given Gupta’s “rise to the pinnacle of his profession” as head of global consulting firm McKinsey and his “nearly unparalleled level of access to upper echelons of corporate executives” throughout the world “creates the risk that, notwithstanding his fall from grace, he remains well-placed to repeat his misconduct in the future.
“Enjoining Gupta from further securities law violations was a permissible exercise of discretion given Gupta’s securities fraud conviction. Barring Gupta from serving as an officer or director was also reasonable because Gupta’s tipping of inside information he obtained as a director was an egregious abuse of trust that demonstrates his lack of fitness to serve in that capacity.
“And enjoining Gupta from associating with brokers, dealers, or investment advisors is appropriate because Gupta’s conviction arose out of his association with Goldman Sachs, the holding company of a constellation of broker-dealers and investment advisors,” the SEC said, adding that the judgment of the district court should be affirmed.
Gupta’s lawyers have argued that instead of protecting the investing public, the injunctions imposed on him by the district court “serve only to punish and stigmatize Gupta.”
He has been convicted in a parallel criminal insider trading case brought against him by India-born federal prosecutor Preet Bharara. He was sentenced to two years in prison but has appealed against his conviction and is awaiting the decision of the appeals court while on bail.
The district court concluded that when Gupta tipped inside information obtained from his “privileged access to information” as a director, he was “guilty of an egregious breach of trust…This conclusion supports the district court’s discretion to order injunctive relief because there is a reasonable expectation of future violation where the defendant’s prior violations were egregious,” the SEC said.
The district court found that, even over a year after his conviction on multiple counts of insider trading, Gupta failed to recognise that his conduct was “improper”.
Gupta’s repeated argument that he himself made no money from any of the trades is “inconsequential” since his misconduct “created substantial losses or the risk of substantial losses to other persons,” even if he did not pocket any direct gains.
Further, the fact that Gupta did not pocket money from the trades is “irrelevant” because a civil penalty is not limited to the tipper’s direct gains, but is calculated based on any profit gained or loss avoided by tippees that occur “as a result of” the “communication” of inside information by non-trading tippers, SEC added.