On Monday, July 11, 2011, New York federal Judge Jed Rakoff denied the SEC's Motion to Dismiss in Gutpa v. SEC, No. 11-cv-1900 (S.D.N.Y.). The Plaintiff, Rajat Gutpa, a former director at Goldman Sachs, has been accused by the SEC of having provided material nonpublic information to Raj Rajaratnam of Galleon Management, who was recently convicted of insider trading (discussed here). Unlike the 28 other defendants named in lawsuits relating to Galleon, the SEC commenced an Administrative Proceeding against Mr. Gutpa. Mr. Gutpa's complaint in federal court (discussed here) alleged that the SEC unconstitutionally deprived him to a jury trial in federal court and that it was necessary to have the question of whether the Dodd-Frank Act provisions could be applied retroactively (which the SEC seeks to do in the Administrative Proceeding) decided in federal court. 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."
On March 1, 2011, the SEC commenced an Administrative Proceeding against Mr. Gutpa, alleging that he engaged in an insider trading scheme by providing information to Mr. Rajaratnam between June 2008 and January 2009. In the Matter of Gutpa, Administrative Proceeding File No. 3-14279. The Court described the SEC's Administrative Proceeding as a "seeming exercise in foreign shopping," noting that the Order instituting the proceeding was not materially different from the complaints filed in federal court against the 28 others Galleon-related defendants. However, in the Administrative Proceeding, the SEC 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.
On March 18, 2011, Mr. Gutpa 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). He also alleged that it was necessary to have the question of whether the Dodd-Frank Act provisions could be applied retroactively decided in federal court.
On April 1, 2011, the SEC moved to dismiss the complaint (also discussed here) under several theories, including: (1) that no statutory basis exists for the Court's assertion of jurisdiction; (2) that Mr. Gupta's claims against the SEC are barred by the doctrine of sovereign immunity; (3) that the doctrines of exhaustion and ripeness bar Mr. Gupta's claims; and (4) that Section 25(a)(1) of the Exchange Act, when read together with Section 703 of the Administrative Procedure Act ("APA"), grants to the courts of appeal exclusive jurisdiction to review orders entered in SEC administrative proceedings.
Judge Rakoff rejected the SEC's arguments regarding jurisdiction (Mr. Gutpa has argued constitutional violations, over which the Court has jurisdiction) and sovereign immunity (Section 702 of the APA "waives sovereign immunity for [any action against the Government] … seeking relief other than money damages."). He also rejected the arguments based on the doctrines of exhaustion and ripeness, noting that Mr. Gutpa should not be required to exhaust his administrative remedies or await a ruling in the Administrative Proceeding when that proceeding is the very procedure he is attacking in his complaint.
Judge Rakoff next turned to the Government's argument that that Section 25(a)(1) of the Exchange Act, when read together with section 703 of the APA, grants the courts of appeal exclusive jurisdiction to review orders in administrative proceedings. Focusing on the Supreme Court's ruling in Free Enterprise Fund v. Pub. Co. Accounting Oversight Bd., 130 S. Ct. 3138 (2010), Judge Rakoff examined three key factors to determine Section 25(a) precluded judicial review of the Commission's order instituting the administrative proceeding: (1) whether the claims in the complaint were outside the SEC's expertise; (2) if the complaint was wholly collateral to the statute's review provisions; and (3) whether a finding of preclusion could foreclose all meaningful review.
The Court concluded that Mr. Gutpa's complaint satisfied the first Free Enterprise element (regarding the SEC's expertise). The allegation that he will suffer from constitutional violations if the provisions of the Dodd-Frank Act is an issue more commonly reviewed by district courts than the SEC. Judge Rakoff concluded his equal protection claim satisfied the second prong because even if the Commission's allegations against Mr. Gutpa were true, his claim that he was arbitrarily and irrationally treated differently from the remaining Galleon defendants was wholly collateral to the securities claims. Judge Rakoff also concluded that Mr. Gutpa's claim satisfied the last Free Enterprise element (whether a finding of jurisdictional preclusion would foreclose meaningful judicial review). The SEC's administrative machinery does not provide a reasonable mechanism for raising a claim, he ruled. In addition, Mr. Gutpa's claim (whether the Commission's decision to treat him differently from the other Galleon-related defendants was irrational, arbitrary and discriminatory) will not be resolved in the administrative proceeding and no record could be developed for review.
The Court concluded that "there is no reason not to address the equal protection claim here before Gupta suffers the very prosecution he alleges constitutes the act of unequal protection." The Court denied the motion to dismiss, but narrowed the theory of the complaint to one of equal protection.
Judge Rakoff ordered the parties to meet and confer regarding a case management plan to allow for discovery, subsequent motion practice and an evidentiary hearing within the next 4 months.