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Judge Rakoff Issues Opinion in Civil Gupta Case Explaining Why He Will Not Compel the SEC to Produce Documents Relating to Settlement Negotiations

Posted in Insider Trading

In a Memorandum Order entered on May 1, 2012, Judge Jed Rakoff formally denied a motion to compel by Rajat Gupta and Raj Rajaratnam, who were seeking an order that the SEC produce documents concerning settlement negotiations between the Commission and cooperating witnesses. In an April 11, 2012 telephone conference, Judge Rakoff tentatively ruled in the Commission’s favor, but allowed the parties to submit letter briefs on the issue. In the Memorandum Order, Judge Rakoff confirmed his tentative ruling, rejecting the defendants’ argument that the information from the negotiations could be used to prove bias, stating that "[t]he best evidence of bias in a cooperator’s testimony comes from the actual agreement he struck with the SEC, not from his lawyer’s attempt to get him a good deal."

In the past fourteen months, the litigation between Mr. Gupta, the former Managing Director of McKinsey & Company and board member at Goldman Sachs and Procter & Gamble, and the Commission has been remarkably active. From the outset, when the SEC brought an Administrative Proceeding against him alleging that he engaged in an insider trading scheme by providing nonpublic material information to Mr. Rajaratnam of Galleon Management, Mr. Gupta has argued that he should be able to take discovery to defend himself in Court. Mr. Gupta and the SEC agreed to the dismissal of the Administrative Proceeding and a related case in August, 2011 (as discussed here). By October 2011, both the SEC and the U.S. Attorney’s Office for the Southern District of New York filed charges against Mr. Gupta (with the Commission also naming Mr. Rajaratnam, as well) (described here).

As they had planned, the attorneys for Mr. Gupta have raised discovery issues. During the factual investigation that preceded the two cases, Assistant U.S. Attorneys from the Southern District of New York and an attorney from the SEC conducted joint interviews of 44 witnesses. Mr. Gupta’s attorneys filed motions in both the civil and criminal cases to seek materials regarding those interviews. On March 26, 2012, Judge Rakoff issued an Opinion and Order in the two cases (discussed here), granting in part a Motion to Compel and ordering the SEC to turn over to the U.S. Attorney’s Office materials relating to the 44 witnesses and ordered the prosecutors to review those memoranda and promptly turn over to the defense any material under Brady v. Maryland, 373 U.S. 83 (1963) (material exculpatory evidence to the defense – including evidence that could allow the defense to impeach the credibility of a prosecution witness).  With respect to the motion in the civil case, Judge Rakoff found that Mr. Gupta could not meet the burden of showing a "substantial need" for the SEC documents sufficient to overcome the attorney work product doctrine (except for the Brady material in the SEC’s notes and memoranda).

In the most recent discovery dispute, Messrs. Gupta and Rajaratnam requested the Commission to produce documents concerning settlement negotiations between the SEC and cooperating witnesses, including tax returns or other financial statements provided by the cooperators to the SEC during negotiations. They argued that the documents were relevant to probing the bias of the cooperators expected to testify against them. The SEC objected, pointing out that the final settlement agreements themselves would satisfy defendants’ interest in materials relating to bias.

Judge Rakoff held that Messrs. Gupta and Rajaratnam failed to demonstrate "that the settlement negotiations are relevant to proving bias." Instead, the Court held, "what is relevant are the actual cooperation agreements themselves. The otherwise protected negotiations that led to the agreements have very limited, if any, additional probative value." Judge Rakoff that the SEC did not have any Wells submissions or statements from the cooperating witnesses. In any event, the Judge noted:

Attorneys stake out adversarial positions in negotiations and engage in "puffing and posturing" in their attempt to obtain the best deal.  But these posturings have only indirect and attenuated relevance, at best, to anything bearing on proof of their clients’ bias.   

Judge Rakoff also pointed out that the probative value of negotiations "is substantially outweighed by the policy concern in protecting against unnecessary intrusions into the settlement bargaining table."

Judge Rakoff also rejected defendants’ request for financial information from the cooperators, because he did not see how it was relevant to bias.  "the cource of any bias in a cooperator’s testimony would be the ‘break’ the cooperator received from the the SEC in exchange for the cooperator’s testimony, something that is readily apparent from comparing the complaint to the final agreement." 

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