In a two-page agreement filed last week in Manhattan federal court, the Securities and Exchange Commission pledged to permanently withdraw administrative and cease-and-desist proceedings against Rajat Gupta for allegedly passing inside information to then-Galleon Group chief Raj Rajaratnam. In return, Mr. Gupta agreed to drop his own suit against the agency to block the administrative case.
In March, Mr. Gupta sued the SEC, accusing the agency of violating his constitutional due process rights by going after him before an SEC administrative judge instead of filing claims in federal court, as the SEC had done in connection with 27 other defendants it accused of insider trading. Mr. Gupta claimed the SEC was improperly applying provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act retroactively to seek civil administrative penalties against him. Those arguments gained substantial traction with Southern District Judge Jed S. Rakoff, who refused to dismiss Mr. Gupta’s case against the SEC last month in Gupta v. SEC, 11 Civ. 1900. The ruling made it clear that the SEC is vulnerable to federal court challenges when it decides to use its enhanced powers under Dodd-Frank to pursue administrative cases, rather than federal lawsuits, against alleged financial malefactors.
