Federal Judge Wants to Keep an Eye on SEC to Make Sure They're Not Bullying Rajat Gupta

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You might think - particularly if you're a certain hedge fund manager counting down the days to a September sentencing - that Rajat Gupta did pretty well by not being prosecuted criminally (yet!) for allegedly passing inside information to Galleon. All he's got so far is an SEC administrative action looking for "disgorgement of ill-gotten gains" and other civil penalties - which, not great, but better than jail.

But then again, not great - and Gupta ran McKinsey so you'd better believe he's looking for ways to optimize the process. First up: get out of SEC administrative "court" and into a real court.

The SEC sued the other 28 people implicated in the Galleon case in federal court, but brought an administrative proceeding against Gupta instead. The SEC has reason to prefer the administrative proceeding, particularly if its case against Gupta is weak, since it's subject to a lower standard of evidence and doesn't involve a pesky jury that can pull a Casey Anthony on them.

But U.S. District Judge Jed Rakoff, repeat scourge of the SEC, agrees with Gupta that this looks a little suspicious. Yesterday he denied the SEC's motion to dismiss Gupta's suit to enjoin the administrative action and force the SEC into federal court, and slapped the SEC for singling out Gupta:

Here ... we have the unusual case where there is already a well-developed public record of Gupta being treated substantially disparately from 28 essentially identical defendants, with not even a hint from the SEC, even in their instant papers, as to why this should be so.

As Larry Ribstein puts it, "so low has the SEC — the agency charged with protecting the financial markets — sunk in this judge’s estimation that it is now deemed worthy of an unusual form of judicial supervision."

Yesterday's ruling doesn't say anything about the merits of the case - indeed, the judge notes that "Gupta's equal protection claim does not have anything to do with whether or not Gupta committed the acts of insider trading alleged" by the SEC. But this is not the first time that the grown-ups in charge have questioned the SEC's work against Gupta, and he has to feel better about his chances in front of a judge who's been so happy to rough up the Commission in the past.

Rakoff Allows Gupta's Lawsuit Against S.E.C. to Proceed [Dealbook]

The SEC under judicial supervision [Truth on the Market]

Rajat K. Gupta v. Securities and Exchange Commission [Scribd via Dealbook]

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Rajat Gupta's Lawyers May Try The "Everybody Was Doing It" Defense

There is much to like in this morning's Journal article about the Rajat Gupta insider trading prosecution, including a nice illustration of how the inside information that Gupta allegedly passed to Raj Rajaratnam actually seems to have been out in the market already. But let's start with the transcript of the call between Raj Rajaratnam and his trader Ian Horowitz, which the Journal has redacted not for confidentiality but for saltiness: Just so you can see Raj Rajaratnam saying "fuck" a lot, the full transcript of that call is here. But, anyway, the Journal story: