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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​



Second Circuit Holds that Landlords Can Be Held Liable under the Fair Housing Act for Failing to Respond to Tenant-on-Tenant Racial Harassment

Case Name: Francis v. Kings Park Manor, Inc.

Date of Opinion: March 4, 2019

Opinion by: Judge ­­­­­Lohier (majority); Judge Livingston (dissent)


In this decision, the Second Circuit held that a landlord may be liable under §§ 3604 and 3617 of the Fair Housing Act of 1968 (“FHA”) and analogous provisions of the New York State Human Rights Law (“NYSHRL”) for failing to take prompt action to address a racially hostile housing environment created by one tenant targeting another, where the landlord knew of the discriminatory conduct and had the power to correct it.

Plaintiff Donahue Francis signed a lease in 2010 and moved into an apartment unit of a complex owned by Defendant Kings Park Manor (“KPM”) and managed by Defendant Corinne Downing shortly thereafter. After several months, Francis’s neighbor Raymond Endres began to subject Francis to a “relentless campaign of racial harassment, abuse, and threats.” Fearing for his personal safety, Francis contacted the police in March 2012 to complain. He filed a police report and spoke to police, who reported Endres’s conduct to the KPM defendants. The KPM defendants did not take action. Francis continued to suffer harassment from his neighbor and filed another police report in May 2012, this time notifying the KPM defendants directly via letter. The KPM defendants again did not respond, and Endres’s conduct persisted—to the point where he was arrested for aggravated harassment, a charge to which he pleaded guilty. In August 2012, Francis sent a second letter to the KPM defendants informing them of Endres’s recent arrest and that Endres continued to direct racial slurs at Francis and anti-Semitic remarks against Jewish people. When Endres attempted to photograph Francis’s apartment in September 2012, Francis contacted the police and the next day sent the KPM defendants a third and final letter complaining about Endres’s continued harassment. The KPM defendants declined to follow up, and instead directed Downing “not to get involved.” Endres remained a tenant of the apartment complex until his lease expired in January 2013.

In June 2014 Francis sued the KPM defendants and Endres for violations of the FHA, the Civil Rights Act, and the NYSHRL, as well as for negligent infliction of emotional distress, and for aiding and abetting a violation of NYSHRL. Francis also sued the KPM defendants for breach of contract and breach of the implied warranty of habitability, and Endres, for intentional infliction of emotional distress. Francis alleged the KPM defendants failed to investigate or attempt to resolve his complaints of racial abuse, instead permitting Endres to remain at the complex until his lease expired without reprisal. The United States District Court for the Eastern District of New York entered a default judgment against Endres when he failed to appear, and granted the KPM defendants’ motion to dismiss under Rule 12(b)(6) except as to the implied warranty of habitability claim.

The Second Circuit vacated the District Court’s dismissal of the federal claims and the NYSHRL claims, remanded for further proceedings, and affirmed the remaining judgment. In so doing, the Court ruled that landlords are subject to the Fair Housing Act if they knew or should have known about third-party conduct that created a hostile environment, and failed to take corrective action despite having had the power to do so.

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Second Circuit Holds that Madoff Trustee May Proceed with Recovering Money From Foreign Investors in Foreign Feeder Funds that Invested in Madoff Securities

Case Name: In Re: Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC

Date of Opinion: February 25, 2019

Opinion by: Judge Wesley


This decision involved 88 consolidated appeals stemming from Bernard Madoff’s Ponzi Scheme.  Many of the direct investors in Madoff Securities (Bernard Madoff’s New York investment firm) were “feeder funds”—entities that pool money from numerous individual investors and then place the pooled money into a “master fund,” like Madoff Securities.  Although Madoff Securities was supposed to then actually invest the money, it instead simply commingled the various investor money into a checking account at JPMorgan Chase.  Whenever an individual investor wanted to withdraw money from a feeder fund, the feeder fund would initiate a withdrawal request to Madoff Securities.  To satisfy the request, Madoff Securities would then transfer commingled investor money from the JP Morgan Chase account to the feeder fund, which in turn would transfer the money back to the individual investor.

After the Ponzi Scheme came to light and Madoff Securities was placed into liquidation, Irving Picard was appointed as Trustee for the Liquidation of Bernard Madoff Investment.  The Trustee sought to recover the moneys that had been “withdrawn” by individual investors from feeder funds that had pooled their money in Madoff Securities.  The Trustee argued that the transactions that occurred when Madoff Securities transferred the commingled moneys to the feeder funds (in response to investor requests) were voidable as fraudulent under § 548(a)(1)(A) of the Bankruptcy Code and could be recovered under § 550(a)(2) of the Bankruptcy Code by the Trustee.  The particular question in these appeals was whether the Trustee could recover such moneys even from foreign investors in foreign feeder funds that had invested in Madoff Securities.

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