Gupta Asks Court to Rethink Order to Pay USD 13.9 Mln Penalty

Published: 08th April 2014 01:55 PM  |   Last Updated: 08th April 2014 01:55 PM   |  A+A-

India-born former Goldman Sachs director Rajat Gupta has asked a US court to reconsider its order asking him to pay USD 13.9 million in civil penalties in the insider trading case, arguing it was unnecessary given the heavy criminal punishment imposed on him.

In a 23-page brief filed with the Court of Appeals yesterday, Gupta's lawyers said the insider trading violations due to which he was convicted were a "dramatic deviation" from a lifetime that has been otherwise marked by "outstanding professional accomplishment" and he should not be made to pay a "heavy criminal penalty".

Gupta's lawyers said he did not accrue any "direct financial benefit" from the insider trading offences and yet he has been ordered to pay a "heavy price" of two years in prison, a USD five million fine and a separate USD six million in restitution to Goldman Sachs.

In addition, the district court ordered 65-year-old Gupta to pay an additional USD 13.9 million dollars in civil penalties and imposed severe lifetime injunctions against him in Securities and Exchange Commission's parallel case.

"The Court should reverse the orders of injunctive relief and vacate and remand the civil penalty for the district court to reconsider in light of Gupta's criminal sentence," the lawyers said in the brief.

Gupta's lawyers stressed that the district court "abused" its discretion in imposing the USD 13.9 million civil penalty after having already sentenced him to serve a two-year prison term, a USD five million fine and more than USD six million in restitution to Goldman Sachs.

Gupta argued that this maximum civil penalty was unnecessary given the heavy criminal punishment imposed on him.

"No reasonable observer could doubt that this heavy criminal penalty for an isolated deviation will have a profound punitive and deterrent effect," Gupta's lawyers said.

"Rajat Gupta was convicted of an offence that, the district court emphasised, was a marked departure from the way he has lived his entire life," the lawyers said in their brief.

They said that Gupta has made "extraordinary and significant" philanthropic contributions and "notwithstanding Gupta's convictions, all of the evidence suggested that Gupta was unlikely to repeat his transgressions."

Last month the appeals court had upheld Gupta's conviction by a district judge on insider trading charges and denied his bid for a new trial, ruling that there is no merit in the former Goldman Sachs director's arguments.

In the civil case, the district court issued three permanent injunctions effectively prohibiting Gupta - who will pay more than USD 25 million in fines, restitution, and penalties as a result of the criminal and civil proceedings against him - from ever serving as an officer or director on a board of a public company or accepting employment that involves associating with brokers, dealers or investment advisers.

Arguing that the district court abused its discretion in imposing the three permanent injunctions, Gupta's lawyers said, "The sanctions imposed by the district court are draconian, and unjustifiably so."

Although district courts have significant latitude in imposing civil remedies, this is the rare instance where the court abused its discretion, they said.

The injunctions are based "entirely on convictions for two incidents in a one-month span that the district court itself recognised were 'atypical'," the lawyers said referring to the two dates in 2008 when Gupta allegedly passed on confidential board information to his friend and business associate hedge fund founder Raj Rajaratnam.

"Reversal is warranted to ensure that civil remedies are limited to their proper function and are not further punishment for crimes that have already been addressed through the criminal law," the brief said.

The district court's sole justification for the penalty was that Congress had intended to make insider trading a "money-losing proposition", which his lawyers said is an "insufficient rationale" given the severe financial consequences already imposed on Gupta and his complete lack of concrete personal benefit from the crime.

"If one thing is clear from the criminal sentence imposed on Gupta, which included USD 11 million in fines and restitution, it is that any offence was well and truly a money-losing proposition," his lawyers said.

Further, SEC's argument that Gupta should pay the trebled civil penalty because he had an alleged net worth of more than USD 80 million in 2008 is not "persuasive".

The SEC contends that a treble civil penalty is warranted because Gupta's tips to Rajaratnam "resulted, in effect, in millions of dollars of losses to those who traded their stock without the benefit of Gupta's inside information."

"But whether others lost money as a result of Rajaratnam's trades (on which no evidence was introduced at trial) has nothing to do with whether a treble civil penalty against Gupta was necessary to make insider trading a money-losing proposition," the lawyers argued.

"To answer that question, it is necessary to consider whether the insider training was a money-earning proposition for the defendant in the first place. Where, as here, the defendant profits nothing, the maximum civil penalty can hardly be sustained, particularly in view of the substantial other penalties that had been imposed," his lawyers said.


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