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SEC Dismisses Insider Trading Administrative Proceeding Against Rajat Gupta, But Reserves Right To Sue Him In Federal Court

Posted in Dodd-Frank Act, Insider Trading, SEC Enforcement Cases, SEC News

The SEC and Rajat Gupta have agreed to settle their dispute regarding the forum in which they should litigate the allegations of insider trading by the former Goldman Sachs director by dismissing the pending actions against each other. Specifically, the SEC has dismissed its Administrative Proceeding against Mr. Gupta alleging insider trading and the parties have advised Judge Jed Rakoff (who is presiding over the lawsuit filed in federal court in New York by Mr. Gutpa against the Commission) that they will be entering a Joint Stipulation of Dismissal. In doing so, the parties agreed that, if the SEC elects to bring action against Mr. Gupta, it will do so in federal court in New York and designate it as related to the other Galleon cases pending before Judge Rakoff.

On March 1, 2011, the SEC commenced an Administrative Proceeding against Mr. Gupta, alleging that he engaged in an insider trading scheme by providing information to Raj Rajaratnam (whose subsequent insider trading conviction is discussed here) between June 2008 and January 2009. In the Matter of Gupta, Administrative Proceeding File No. 3-14279.

On March 18, 2011, Mr. Gupta filed a complaint in federal court against the Commission seeking a declaratory judgment and injunctive relief, alleging that by seeking civil penalties through the retroactive application of the Dodd-Frank Act in the Administrative Proceeding, the SEC unconstitutionally deprived him to a jury trial in federal court (pointing out that the SEC has filed all of its cases related to Mr. Rajaratnam and Galleon in federal court). Gupta v. SEC, No. 11-cv-1900 (S.D.N.Y.). On April 1, 2011, the SEC moved to dismiss the Gutpa v. SEC complaint (discussed here).

As previously discussed here, on July 11, 2011, Judge Rakoff denied that motion. In doing so, the Court described the SEC’s Administrative Proceeding as a "seeming exercise in foreign shopping." By denying the SEC’s motion to dismiss, Judge Rakoff allowed Mr. Gutpa’s case to proceed, but ruled that "the theory of the Complaint is narrowed to one of equal protection." Judge Rakoff also entered a Case Management Plan which set the case for a final pretrial conference on October 31, 2011.

After a series of extensions, the SEC’s answer to Mr. Gutpa’s complaint in federal court was due on August 3, 2011. However, on that day, the parties submitted a two-page Agreement to the Court (here, attached to Judge Rakoff’s August 4, 2011 order described below). The Agreement provided that:

• the SEC would dismiss the Administrative Proceeding against Mr. Gutpa (although not on the merits) (and agree not to bring another administrative proceeding based against him on the same allegations);

• the Gutpa v. SEC lawsuit would become moot once the Administrative Proceeding was dismissed;

• the parties would stipulate to the dismissal of the Gutpa v. SEC lawsuit; and

• the parties agreed that any future action against Mr. Gutpa based on the same allegations in the Administrative Proceeding "shall only be filed in the U.S. District Court for the Southern District of New York," and "the SEC will designate it as related … to the other Galleon cases presently pending before the Honorable Jed S. Rakoff."

After receiving the Agreement, Judge Rakoff, on August 4, 2011, entered his Order staying the Gutpa v. SEC case to allow the parties time to prepare the Joint Stipulation of Dismissal. Also on Thursday, the SEC entered an Order Dismissing Proceedings in the Administrative Proceeding, stating: "The Commission has determined that it is in the public interest to dismiss these proceedings. Dismissing these proceedings will not prevent the Commission from filing an action against Mr. Gupta in United States District Court."

When Judge Rakoff denied the motion to dismiss in Gutpa v. SEC, he noted that the Order instituting the Administrative Proceeding was not materially different from the complaints filed in federal court against the 28 others Galleon-related defendants. The SEC may now file the suit against him in that forum. Mr. Gutpa has achieved his goal – if he has to defend himself against insider trading charges by the SEC, he will be able to do so in federal court, where he will be able to conduct discovery and present his case to a jury. For the SEC, it will still be able to bring its claims in Court, but it will be interesting to see whether it seeks to recover civil penalties from Mr. Gutpa under Section 929P of the Dodd-Frank Act, which was not passed until 18 months after the conduct in question, as it did in the Administrative Proceeding.