Judicial Hobbling of the SEC: Gupta v. SEC (Part 2)

The SEC chose to bring an action against Rajat Gupta as an administrative proceeding.  What is the consequence of this determination? 

Administrative proceedings are litigated before administrative law judges at the SEC.  These decision makers have relative independence but any appeal from their determination goes to the Commission.  For some, therefore, the administrative process is skewed toward the agency.  Only when the matter is appealed from the agency to the US Court of Appeals will there be a review that is entirely outside the agency.  Administrative actions do not provide for the use of juries or the rules of evidence. 

What ever issues exist with the administrative process, it is a system put in place by Congress.  Traditionally with respect to the SEC, there were plenty of reasons why administrative proceedings were not the preferred route in bringing an action.  For one thing, violations (unlike injunctions), are not subject to contempt proceedings.  As a result, the actions have less teeth.

In addition, traditionally, administrative proceedings did not permit the full range of remedies that the agency might seek.  Director bars are not permitted in administrative proceedings.  And, until Dodd-Frank, the SEC could not seek penalties against persons associated with non-regulated industries. 

Dodd-Frank, however, took away one of the disadvantages to administrative proceedings.  See Section 929P of Dodd Frank (amending Section 21B(a) of the Exchange Act).  The Agency can now seek penalties in the proceedings against persons who are not associated with regulated entities.  Indeed, the administrative proceeding against Gupta is the first to seek penalties under this authority.  See Remarks at SIFMA’s Compliance and Legal Society Annual Seminar, Director of Enforcement Robert Khuzami, March 23, 2011 (case against Gupta was “the first use by the SEC of its new authority under Dodd-Frank to obtain penalties in an Administrative Proceeding against persons not associated with a regulated entity.”). 

Gupta was, however, unhappy with the choice of forum and brought a separate action challenging the SEC's decision.  The Complaint alleged that, by bringing the action as an administrative action, the SEC was violating his statutory and constitutional rights.  Gupta essentially argued that he was subject to unequal treatment since all of the other persons involved in the same general fact pattern had been sued in federal court and not subjected to an administrative proceeding.  In addition, he argued that the SEC was seeking retroactively to apply Section 929P from Dodd-Frank by imposing penalties on behavior that occurred prior to the adoption of the Act.

The SEC moved to dismiss the case, essentially arguing that Gupta should raise any legal issues in the administrative proceeding.  The district court disagreed.

Primary materials in this case, including the court's opinion, can be found at the DU Corporate Governance web site.

Comments

[Charles Seavey]

No way to be sure what the SEC's reasoning was, but the entire history of these remedies is that administrative proceedings are the least that can be done against a defendant without doing nothing. Next level of seriousness is a civil action in federal court. Highest level is criminal charges.

Press reports indicate that the DOJ was outraged that the SEC was not joining them in giving Gupta a free pass. The SEC felt, with good reason, that they were morally obliged to charge Gupta with SOMETHING considering that his violations were the most egregious of all of the 50 insider trading defendants. (Gupta tipped Raj right after Goldman board meetings, in about as outrageous and blatant a breach of fiduciary duties imaginable and exactly the kind of criminal conduct the insider trading laws were designed to punish.)

Anyway, it seems plain to me that the primary reason that the SEC only charged Gupta in a lame administrative proceeding as opposed to a federal civil action was because that was their way of compromising with an outraged Preet Bharara, who preferred that the SEC do nothing at all.

I think Judge Rakoff is perfectly well aware that this is what happened and is outraged that both the SEC and the DOJ have pretty much given Gupta a free pass. He is calling attention to the SEC and DOJ's blatantly preferential treatment of Gupta relative to the other 49 defendants by allowing Gupta's case to go forward.

Gupta would probably like to think that Judge Rakoff's ruling indicates that he thinks Gupta is being unfairly prejudiced. Instead Judge Rakoff more likely allowed Gupta's action to go forward because he is outraged that Gupta has not been treated harshly enough.

As for Gupta and his lawyers, I am amazed that they are not smart enough to shut up and enjoy the elite privilege that is the only thing that is standing between Gupta and a long time in prison.