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July 12, 2011 4:59 PM

Judge Rakoff Won't Toss Rajat Gupta Suit Against SEC

Posted by Nate Raymond

From The Litigation Daily

We imagine that somewhere high on the list of things officials at the Securities and Exchange Commission would like in life--beyond more money--would be the retirement of Manhattan federal district court judge Jed Rakoff. The 68-year-old has become practically infamous for criticizing common practices at the agency and for railing against proposed SEC settlements with the likes of Bank of America and Vitesse Semiconductor. This week Judge Rakoff is at it again, thanks to the insider trading case against former McKinsey & Company managing director Rajat Gupta.

As we've reported, Gupta's lawyers at Kramer Levin Naftalis & Frankel sued the SEC in March, after he became the sole defendant out of 29 people charged in the Galleon Group insider trading investigation to face SEC's claims in an administrative proceeding, rather than in a federal district court suit. On Monday Judge Rakoff denied the SEC's motion to dismiss Gupta's suit, chiding the agency for its "seeming exercise in forum-shopping." Judge Rakoff narrowed Gupta's complaint slightly but allowed him to pursue claims that the SEC violated the Equal Protection Clause of the Constitution. (The 22-page decision is here.)

At a hearing in March in a separate case, Bloomberg reported that Judge Rakoff said he "didn't see why Mr. Gupta is the subject of an administrative proceeding before the SEC while everyone else is the subject of a proceeding before a district court judge." At a lecture in April, he told attendees that a "concern I have about [the Dodd-Frank financial reform law] is that it puts more adjudication into the hands of the SEC and its administrative judges," according to Reuters.

Judge Rakoff acknowledged in Monday's ruling that it would "not be prudent" to allow every defendant facing an SEC action to bring a parallel federal lawsuit. But Gupta's case was special, he concluded. "Here, by contrast, we have the unusual case where there is already a well-developed public record of Gupta being treated substantially disparately from 28 essentially identical defendants, with not even a hint from the SEC, even in their instant papers, as to why this should be so," Judge Rakoff wrote.

Gary Naftalis of Kramer Levin, Gupta's lawyer, declined to comment. SEC spokesman John Nester said the agency was "reviewing the decision and will proceed in a manner that maintains the commission's authority to best serve the interests of investors and the integrity of the markets."

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