Category: Securities Litigation

Second Circuit Affirms $92.8 Million Civil Penalty for Insider Trading Violations

Case Name: SEC v. Raj Rajaratnam, et al.

Date of Opinion: March 5, 2019

Opinion by: Judge Lynch


In 2011, Raj Rajaratnam, former hedge fund manager of Galleon Management, LP, was indicted in the Southern District of New York on nine counts of securities fraud under Section 17(a) of the federal Securities Act and Section 10(b) and Rule 10b-5 of the Exchange Act. Rajaratnam’s criminal indictment was based on his insider trading of the stock of five different companies, in addition to five counts of conspiracy to commit insider trading.

On the day of his arrest, the Securities and Exchange Commission (“SEC”) filed a related civil action against Rajaratnam in the Southern District of New York. The SEC based its civil allegations on the same insider trading conduct charged in the criminal case, as well as additional violations of the Securities and Exchange Acts stemming from Rajaratnam’s alleged purchases and sales of stock in certain companies based on material nonpublic information. In the civil action, the SEC sought an injunction against further securities violations, disgorgement of Rajaratnam’s gains from the alleged violations, and a civil monetary penalty under Section 21A of the Exchange Act.

Following an eight-week trial in the criminal case, a jury found Rajaratnam guilty on all counts, and he was sentenced to 132 months’ imprisonment and ordered to pay a $10 million criminal fine and a court-imposed forfeiture of $53.8 million. Following Rajaratnam’s conviction and sentencing, the SEC moved for partial summary judgment on the civil insider trading claims that formed the basis of Rajaratnam’s criminal conviction. Rajaratnam conceded liability based on principles of equitable estoppel, leaving the amount of the civil penalty as the sole issue for the district court to decide on summary judgment. The district court accepted Rajaratnam’s calculation that the “total profit gained and loss avoided” from the insider trades was $30,935,235, and that he personally gained approximately $4.7 million.  It then determined that the language of Section 21A imposing a penalty of “three times the profit gained or loss avoided” was not limited to a penalty equal to three times Rajaratnam’s personal gains of $4.7 million. Rather, the court held, the penalty extended to the total profit of nearly $31 million from the illegal trades he secured. Based on this reading of the statute, and considerations of Rajaratnam’s “egregious” violations, the district court imposed the maximum civil penalty of $92,805,705.

On appeal before the Second Circuit, Rajaratnam made two main arguments. First, he argued, as he did in the district court, that Section 21A penalties are not permitted to exceed three times of his personal profit gained or loss avoided. Second, Rajaratnam argued that the district court abused its discretion in imposing the maximum penalty because it impermissibly relied on his wealth and ability to pay and ignored the criminal penalties previously imposed on him.

In analyzing the permissible extent of a Section 21A penalty, the Second Circuit relied on the plain meaning of the statute and case law, and agreed with the district court that Section 21A “permits a civil penalty to be based on the total profit resulting from the violation.” The Court also found that the district court’s interpretation of Section 21A was consistent with the congressional intent of federal securities laws to allow civil penalties based on the total profit resulting from a violation, rather than merely the profit earned by the defendant. Moreover, the Court determined that the lower court’s penalty effectuated the purpose of Section 21A to deter the exact conduct that Rajaratnam had been found liable for (both criminally and civilly).

As to Rajaratnam’s abuse of discretion argument, the Second Circuit relied on its own precedent, as well as the precedent of other circuits, in determining that the district court permissibly considered Rajaratnam’s wealth and ability to pay in imposing the civil penalty. Specifically, the Court found that the district court had undertaken “a careful and thoughtful analysis of the factors bearing on the appropriate penalty.” Moreover, the Court determined that the district court properly considered Rajaratnam’s criminal penalty in calculating his civil penalty, and Section 21A contemplates and permits the imposition of civil penalties in addition to criminal penalties.

Accordingly, the Second Circuit affirmed the district court’s imposition of a $92,805,705 civil penalty against Rajaratnam.

To read the full opinion, visit

Summary by: Amy O’Brien​



In a First, the Second Circuit Extends Discovery Accrual Rule to Commodities Exchange Act, Barring Claims

Case Name: Levy v. BASF Metals, Ltd.

Date of Opinion: February 28, 2019

Opinion by: Per curiam


After obtaining a partial recovery in the 2014 settlement of a suit alleging platinum market manipulation class action, the plaintiff, an attorney proceeding here pro se, brought the present action against a different set of defendants on September 16, 2015. In the 2015 complaint, she raised similar platinum market manipulation claims in violation of state and federal law. She alleged that she first learned about certain conduct by the defendants, and their identities from a complaint filed in a related 2014 class action suit. The United States District Court for the Southern District of New York granted defendants’ motion to dismiss, finding that the plaintiff’s federal claims were time barred, and declined to exert supplemental jurisdiction over her state law claims.

The Second Circuit affirmed the district court’s decision in a summary order published simultaneously with a separate decision where they specifically address the plaintiff’s Commodities Exchange Act (“CEA”) claims. In so affirming that her federal claims were time-barred, the Court held, for the first time, that Rotella v. Wood, 528 U.S. 549 (2000) applies to CEA claims. Under Wood, federal courts apply a ”discovery accrual rule” – pursuant to which “discovery of the injury, not discovery of the other elements of the claim” will “start[s] the clock” for statute of limitations purposes – when a statute does not address the issue.

In applying the rule to the facts in the case, the Court found the plaintiff discovered her CEA injury when she suffered the financial losses in 2008 in what her complaint describes as “’an extraordinary, unprecedented and unjustified sudden collapse’” in market price. Because the CEA sets a two-year limitations period, plaintiff’s 2015 suit was thus time -barred. The Court emphasized that the date on which this plaintiff had actual knowledge of her injury, and not years later when she discovered additional information relating to the identity of the defendants or other information about the manipulation scheme necessary for her to bring suit, determined the limitations period.

To read the full opinion, please visit:

Summary by: Matla Garcia Chavolla

Second Circuit Allows Derivative Shareholder Lawsuit to Go Forward Even After Plaintiff Loses her Financial Stake in the Entity, Distinguishing Between Standing and Mootness

Case Name: Klein v. Cadian Capital Mgmt., LP – Second Circuit 

Date of Opinion: October 2, 2018

Opinion By: Judge Pooler (majority); Judge  Lohier (dissent)


Appellant Terry Klein brought a derivative lawsuit suit as a shareholder of Qlik Companies. She alleged that a group of funds (referred to collectively as the “Cadian Group”) owned more than ten percent of Qlik and engaged in short-swing transactions in Qlik stock in 2014, in violation of Section 16(b) of the Securities Exchange Act. Subsequently, the action was stayed pending resolution of a motion in a related case. While the action was stayed, a private equity company bought out Qlik in an all-cash merger. As a result of that merger, Klein lost any financial interest in the litigation.

After the stay was lifted, Cadian Group moved to dismiss the action for lack of standing. Klein moved to substitute Qlik itself as a plaintiff under Rule 17(a)(3) of the Federal Rules of Civil Procedure. The United States District Court for the Southern District of New York granted the Cadian Group’s motion to dismiss and denied Klein’s motion to substitute. The District Court reasoned that Klein’s lack of continuing financial interest in the litigation caused her to lose standing, which made the case moot. In the alternative, the District Court found that Qlik could not be substituted under Rule 17(a)(3) because Klein had not made an “honest mistake” in failing to include Qlik as a plaintiff.

The Second Circuit disagreed, and vacated the ruling.  The court explained that Klein had already established her standing by virtue of the fact that she had a personal stake at the outset of the litigation.  The only question, therefore, was whether the case was now moot.  As the court put it, the standing doctrine “evaluates a litigant’s personal stake as of the outset of litigation,” while the mootness doctrine “determines what to do if an intervening circumstance deprives the plaintiff of a personal stake in the outcome of the lawsuit, at any point during litigation after its initiation.”

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