Raj Gupta’s hail Mary pass

March 19, 2011, 1:40 AM UTC

Good luck to Rajat Gupta on this one.

The accused corporate Benedict Arnold struck back at securities regulators Friday, accusing them in a lawsuit of running roughshod over his due process rights.

Go deep!

Gupta sued the Securities and Exchange Commission, claiming it “unfairly and unconstitutionally” singles out Gupta by seeking to try him before an SEC administrative law judge rather than a federal district court.

The SEC filed civil charges March 1 against Gupta, alleging he leaked the details of Goldman Sachs (GS) and Procter & Gamble (PG) board meetings to traders at hedge fund Galleon Group. Those traders, led by Raj Rajaratnam, went on to make millions of dollars in illicit profits by illegally trading on the information, the SEC alleges.

Gupta’s lawyer says his client is innocent. Rajaratnam is fighting Justice Department insider trading charges in a trial that started this month.

The SEC declined to comment, but Gupta’s claims come two days after U.S. District Judge Jed Rakoff, presiding over a hearing in an SEC case against a former Galleon trader, cast aspersions on the agency’s decision to bring Gupta’s charges administratively.

Rakoff called the SEC’s move “bizarre,” given that all the other Galleon cases are being heard in the federal district court rather than before an administrative law judge. It has occurred to some people that perhaps the SEC made that decision because it thought the case stood a better chance of success that way.

“The SEC may have opted for the course because it may be easier for them to prevail based on the favorable forum of an administrative proceeding and the lowered burdens of proof in a civil proceeding,” said Eric Chaffee, an associate law professor at the University of Dayton. 

To that end, Gupta’s lawyers claim the SEC “deprived Mr. Gupta of protections owed to him” by trying him administratively. They claim, among other things, that the SEC is wrongly seeking to retroactively apply the Dodd-Frank Act — which gives the agency the power to charge individuals not associated with broker-dealers.

But Gupta may have a hard time making that case stand.

“As Judge Rakoff correctly points out, choosing to single out Gupta for this treatment is surprising,” Chaffee adds. But “these types of actions have been allowed in the past against people associated with a broker-dealer, meaning that the action against Gupta has a fair chance of being allowed to proceed because of the permissibility of similar proceedings against other types of individuals in the past.”

So Gupta can rail about unfairness all he likes, but don’t expect it to wash in court.

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