Raj Rajaratnam, co-founder of Galleon Group LLC, in 2011. Photo: Peter Foley/Bloomberg

The $92.8 million civil penalty levied against former Galleon Management hedge fund manager Raj Rajaratnam was upheld by the U.S. Court of Appeals for the Second Circuit, despite claims the district court abused its discretion by imposing the hefty penalty.

Circuit Judges Reena Raggi, Gerard Lynch and Christopher Droney upheld the civil penalty imposed by U.S. District Judge Jed Rakoff of the Southern District of New York against Rajaratnam and sought by the U.S. Securities and Exchange Commission under Section 21A of the Securities Exchange Act.

The civil penalty came after Rajaratnam had already been found guilty in 2011 of criminal insider trading, sentenced to 11 years in prison, a record for insider trading, and was fined and order to forfeit more than $63 million.

On appeal, Rajaratnam argued the district court erred in interpreting the civil penalties statute to allow for one three-times the total profit gained through the insider trading scheme, rather than the roughly $5 million Rajaratnam himself made through his illict conduct.

In an extensive footnote, the panel dismantled Rajaratnam's argument pointing to the circuit's own ruling in 2012's United States v. Contorinis criminal appeal. There, the circuit ordered the defendant couldn't be ordered to forfeit profits he neither received nor possessed, noting that the criminal statute doesn't expressly identify who must do the acquiring that results in forfeiture.

Rajaratnam argued that since the securities penalty statute similarly failed to be specific, the circuit's reasoning in Contorinis should hold. In disagreeing, the panel said it noted that forfeitures are different than penalties and went so far as to suggest in the referenced opinion that other scenarios could mean different results.

“Nothing in the idea of a civil penalty, which is designed to deter future violations, implies a comparable limitation to funds in the immediate possession of the violator,” the panel wrote.

The panel went on to point to the fact that Congress elsewhere in securities law placed specific limits on penalties, indicating the expansive nature of the operative securities statute, which extends even to tippers who may never have received financial gains from the tip but are still subject to penalties.

The purpose of the statute, then, was to “deter the whole of the conduct” Rajaratnam was engaged in by exacting a heavy price for doing so.

“Rajaratnam was motivated to orchestrate not merely a scheme to gain a few million dollars by trading in his own account, but a massive project that gained tens of millions for his clients and associates,” the panel said. “As Congress recognized, in order to remove that motivation, an appropriate penalty must be keyed to the total scope of the scheme.”

The panel went on to dismiss Rajaratnam's argument that the district court had abused its discretion in imposing so harsh a penalty, pointing to Rakoff's use of established factors for determining such penalties—all of which were qualified by Rajaratnam's actions—and that bringing Rajaratnam's wealth in as a factor was appropriate, as the record showed the court wasn't interested in symbolic penalties that couldn't ever be paid.

Rajaratnam's legal team on appeal was led by Jones Day partner Samidh Guha. He did not respond to a request for comment.

A spokeswoman for the SEC declined to comment on the decision.

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