Sec. & Exch. Comm'n v. Gowrish
| Decision Date | 14 July 2011 |
| Docket Number | No. C 09-05883 SI,C 09-05883 SI |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. VINAYAK S GOWRISH, Defendant. |
| Court | U.S. District Court — Northern District of California |
On July 12, 2011, the Court heard argument on plaintiff's motion for entry of proposed final judgment. Having considered the arguments of counsel and the papers submitted, the Court hereby rules as follows. A final judgment will be entered separately.
This is a civil prosecution of defendant Vinayak Gowrish for insider trading. The SEC alleged that defendant was a tipper in an insider trading scheme that involved Adnan Zaman, Pascal Vaghar, and Sameer Khoury. The SEC alleged that defendant provided Adnan Zaman with information that three companies were likely to be acquired; and that Zaman then tipped Vaghar and Khoury, who invested in the three companies. The SEC calculates that Vaghar and Khoury made $374,912 in profits. See Pl. Exs. to Memo. in Supp. of Proposed Final Judgment (Doc. 156), Ex. A ("Calculation of unlawful trading profits"). Defendant does not contest that number.
Mr. Zaman pleaded guilty to criminal securities fraud and was sentenced to 26 months in prison. See Case No. CR 09-1178, Doc. 33. A consent judgment was entered again him in this civil case, andhe was ordered to disgorge $68,790 in profits and $9,666 in prejudgment interest. Doc. 8. A consent judgment was entered against Sameer Khoury, he was found liable for disgorgement of $172,985 in profits and $25,622 in prejudgment interest, but he was not ordered to pay the SEC any disgorgement money. Doc. 11. A consent judgment was entered against Pascal Vaghar, he was found liable for disgorgement of $318,784 in profits and $47,217 in prejudgment interest, but he was only ordered to pay the SEC $33,000 in disgorgement. Doc. 10.1
At trial, the SEC and defendant presented different accounts of the insider trading scheme. The SEC argued that defendant knew of the scheme, intended to participate in it, received some cash from Vaghar, intended to benefit from providing tips primarily by receiving friendship and an ego boost, and tried to cover up the scheme once the SEC began its investigation. In support of its theory, it elicited testimony from Vaghar that Vaghar thanked defendant for information, paid him cash in exchange for that information, and worked with defendant to come up with explanations for his trades when the SEC was investigating; and that defendant paid for Vaghar's attorney for a time during the SEC investigation. Defendant's theory was that he accidentally divulged confidential information from which the perpetrators of the scheme deduced how they should invest, and that he received no financial benefits. In support of his theory, he elicited testimony from Zaman that defendant knew nothing of the insider trading scheme. Defendant also testified at the trial, and he attempted to impeach Vaghar with evidence that Vaghar has significant cognitive deficiencies, including memory problems, as a result of a traumatic brain injury.
Vaghar is the only witness who testified that defendant benefitted financially from the insider trading scheme. He testified at trial that defendant shared in the earnings, and in particular that Vaghar wrote checks to cash on his Charles Schwab account, and paid either Zaman or defendant that cash. He testified that he believed that Zaman would share the cash Zaman received with defendant. TR 215. The SEC presented evidence of a check dated April 16, 2007 for $5,000 with the words "VIN DOG" in the subject line. PX 1005. Vaghar testified that he paid the $5,000 directly to defendant. TR 215.The SEC also presented evidence of a check dated June 12, 2007 for $5,500 with the words "V DOG & RAT" in the subject line. PX 1006. As to the second check, Vaghar testified "the cash was for both of them, but I don't recall if I gave it directly to Vinnie or if I gave it directly to Adnan and Adnan was going to give Vinnie his cut." TR 215.2
On February 4, 2011, a jury found defendant liable on all three claims of insider trading in violation of Section 10(b) of the Securities and Exchange Act and Rule 10b-5. Doc. 133. The jury found (1) that defendant knowingly provided material, non-public information regarding three companies to Zaman, in breach of defendant's duty to his employer; (2) that defendant did so knowing, expecting or recklessly disregarding the fact that Zaman would trade, or tip others to trade, securities in those three companies on the basis of that information; (3) that a recipient of that information did use that information to trade securities in those three companies while the information was both material and nonpublic; and (4) that defendant provided the information to Zaman with the intent to benefit himself, directly or indirectly. Id.
In a joint pre-trial statement, the parties agreed that "the appropriate equitable and legal relief [would] be determined by the Court in the event the defendant [were] found liable for the claims brought by the SEC." Doc. 78 at 2-3. Pending before the Court is the SEC's motion for entry of final judgment.
The SEC requests that the Court enter judgment enjoining defendant from further violation ofSection 10(b) of the Securities and Exchange Act and Rule 10b-5; ordering defendant to disgorge the entire $374,912 of profits earned by all of the participants in the insider trading scheme, along with $85,479 in prejudgment interest; and assessing a substantial civil penalty (perhaps the maximum permitted by law, $1,124,737.23). As part of its request, the SEC suggests that defendant should be held jointly and severally liable with his codefendants, and that the Court should not consider defendant's ability to pay.
The SEC also suggests that, when calculating the appropriate disgorgement figure in this case, the Court not consider the amount of money that his codefendants were ordered to disgorge to the SEC. Specifically, the SEC argues that the codefendants participated in a broader insider trading scheme, and that the disgorgements ordered against the codefendants should be considered to offset the profits earned from the parts of the scheme in which defendant did not participate.3
Defendant argues that the Court should not enter an injunction, should order defendant to disgorge no more than $6,000, and should assess civil penalties no higher than $12,000.4 Defendant also requested an evidentiary hearing, in which he would have the opportunity to examine Vaghar in light of what he calls "new evidence" of Vaghar's cognitive disability. The Court already denied this request during a separate hearing, see Minute Entry (Doc. 185), and discusses that decision in more detail below.
While Pascal Vaghar was serving in the military in the 1990s, he was in a car accident. A drunk driver hit his car, his skull was fractured, and he retired early from the Navy.
Before trial, the SEC filed a motion in limine to bar any references to any disabilities that might have resulted from the accident. Doc. 79. The Court denied this motion in large part. See Doc. 117. The Court permitted defendant to cross examine Vaghar regarding his psychiatric diagnoses to theextent that they might affect his memory or perception. The Court also permitted defendant to cross examine Vaghar to the extent that any inconsistencies in his reports about his disability might affect his credibility as a witness.
At trial, Vaghar was cross examined extensively about his memory and any cognitive impairments stemming from the car accident. See, e.g., TR 321:15-321:23; 323:22-324:10; 373:2-373:8. When asked if he was fifty percent cognitively disabled, he agreed that he was, though he also noted that he was not confident about the exact number. TR 321:15-321:18. The jury and the Court were able to observe Vaghar's confusion as to details, dates, and sequences of events. Vaghar himself testified dozens of times that he was unable to remember things. Defendant's attorney argued to the jury that Vaghar's memory was "unreliable" and his testimony was not to be believed. See, e.g., TR 129:4.
After the jury found defendant liable for insider trading, defendant hired a new attorney. The new attorney requested that the Court order the VA to produce Vaghar's medical records, and, over the SEC's objection, the Court did so.5 See Docs. 151, 158, 159. Defendant now argues that the records produced by the VA constitute new facts, and on that basis argues that a new examination of Vaghar would elicit testimony relevant to the penalties phase of this case.
On June 30, the Court heard argument as to whether Vaghar should again be compelled to testify, and denied defendant's request. Defendant argued that Vaghar's testimony would demonstrate that "there is no reliable evidence that proves that Mr. Gowrish" earned money from the insider trading scheme, which it argues is necessary before the Court orders disgorgement. Def. Oppo. to Pl. Mot. for Entry of Final Judgment (Doc. 165), at 20 (emphasis added). Defendant was not able to explain,however, how the Court would be assisted at the remedies phase by more testimony from Vaghar, who testified extensively at trial and was cross examined vigorously, especially since the Court is in possession of the VA records themselves. Additionally, defendant's argument fails to take into account the different burdens that the parties are under at the remedies stage. As discussed below, the relevant question for the Court at the remedies phase is whether the SEC can meet its "burden of persuasion that its disgorgement figure reasonably approximates the amount of unjust enrichment." SEC v. Platforms Wireless Intern. Corp., 617 F.3d 1072, 1096 (9th Cir. 2010). It need not "prove" how much money defendant received. The burden then "shifts to the defendants to demonstrate that the disgorgement figure...
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