Why the SEC Is Bringing an Administrative Action Against Rajat Gupta

Rajat Gupta
Umesh Goswami | The India Today Group | Getty Images
Rajat Gupta

Apparently, there’s a lot of confusion about why the SEC chose to bring the action against alleged insider trader Rajat Gupta as an administrative procedure rather than a civil or criminal trial in federal court.

It’s even making some wonder whether the case against Gupta might be especially weak.

It shouldn't. The SEC is bringing the case against Gupta as an administrative proceeding for the same reason a hog rolls in the mud--because it can.

Andrew Ross Sorkin encapsulates the confusion in his column today:

“This is very unusual. It’s a red flag,” Kip Weissman, a partner at Luse Gorman Pomerenk & Schick in Washington and a former S.E.C. enforcement lawyer, said of the case.

Not only has the Justice Department not brought a criminal case, at least not yet, but the S.E.C. decided to bring its case in front of an administrative law judge instead of in a Federal District Court, where a defendant has full discovery rights. The S.E.C. is using a new provision in the Dodd-Frank Act to bring the case this way.

“It’s a little easier from an evidentiary perspective,” Mr. Weissman said, for the S.E.C. to bring the case in front of an administrative judge. “The evidentiary standard is lower,” he explained. “It’s certainly noteworthy that the S.E.C. brought the case in this forum.”

Indeed, statistically, it is notable: of the 26 Galleon-related cases the S.E.C. has brought, all have been brought in federal court. None have been brought in front of an administrative judge. As Mr. Weissman asked, somewhat rhetorically, “Why?”

It's really not all that mysterious.

There are many reasons for the SEC to prefer administrative actions over civil trials. The law firm Gibson Dunn laid them out in a client memo last summer, after Dodd-Frank was passed.

(1) administrative actions go to hearing on an accelerated schedule in which a hearing must be completed and an initial decision rendered by an administrative law judge within 270 days of the filing of the Commission's complaint;

(2) there is no discovery in administrative proceedings;

(3) there is no right of trial by jury; and

(4) factual findings by the SEC in an administrative proceeding can only be reversed on appeal if the defendant shows that the findings failed to meet the "substantial evidence" test.

Prior to Dodd-Frank, the SEC was limited when it came to who it could bring an administrative action against.

Fines for violating securities laws are considered quasi-criminal penalties. So when Congress initially granted the SEC the authority to demand these penalties, it said they could only be levied in administrative actions against someone who worked for a brokerage or an investment company. The idea was that only people who voluntarily subjected themselves to SEC regulation by going to work for a regulated enterprise should be subject to this kind of authority.

For years the SEC got around this by bringing two different actions against alleged targets who didn’t work for regulated firms. It would bring an administrative action seeking a cease and desist order and a civil action in federal court seeking fines.

Dodd-Frank ended the limitation on administrative actions, allowing the SEC to abandon the two-proceeding format. Now anyone can be hauled into an administrative proceeding.

Gupta’s case is notable because it is arguably the first use of this new authority by the SEC. It almost certainly will not be the last.


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