Accused Raj Rajaratnam tipster Rajat Gupta has sued the Securities and Exchange Commission, accusing the regulator of unconstitutionally attempting to deny him a jury trial.
Gupta, the former McKinsey & Co. chief and Goldman Sachs director, said the commission should have sued him in federal court, as it did with all of its other Galleon Group defendants, rather than launch an administrative action against him. In an administrative action, the chips are stacked in the SEC's favor: It can use hearsay evidence, the case is heard before an SEC administrative law judge and discovery rules are much less favorable to defendants.
"The Commission is unfairly and unconstitutionally singling out Mr. Gupta," his lawyer, Gary Naftalis, said in the lawsuit, noting that the agency filed "all of its Galleon-related cases against at least 27 other defendants" in federal court. Gupta wants the SEC to do the same, and has also asked that civil penalties be barred.
The SEC accuses Gupta, who has not been charged with any criminal wrongdoing, although prosecutors have identified him as a co-conspirator in the insider-trading case, with passing confidential information about Goldman and Procter & Gamble to Rajaratnam.
"Gupta denies all allegations of wrongdoing and stands ready to mount a defense against each and every one of the commission's charges," Naftalis wrote.
Naftalis took issue with the SEC's inviting Gupta to submit the main points of his defense without telling him it might seek an administrative proceeding against him, and noted that the Dodd-Frank Act, under which the SEC is empowered to bring administrative proceedings instead of civil complaints, did not become law until more than a year after Gupta's alleged tips were passed to Rajaratnam.
What's more, the SEC may already be in trouble: The case was assigned to U.S. District Judge Jed Rakoff, who said during a hearing on a separate SEC case against a Galleon defendant that the administrative action against Gupta was "bizarre."
Meanwhile, Gupta, who is expected to testify for the defense at the Rajaratnam trial, which continued today, stepped down as chairman of the Indian business school he co-founded. The Indian School of Business said Gupta, who has already resigned from a number of corporate boards and Kohlberg Kravis Roberts, where he served as a senior adviser, "requested the ISB executive board to relieve him of his board responsibilities till his pending matter with the U.S. SEC is resolved." Gupta has also taken a leave of absence from New Silk Route Partners, the private equity firm he co-founded with Rajaratnam.