For now, we focus on his discussion of the "commentary" on the “neither admit nor deny” policy. First, he had this to say about settlements.
Refusing to approve such a settlement was in his view an "unwise policy." As for the purported fear of going to trial, Khuzami noted that the Division was not "reluctant to try cases." Cases were settled for "the right reasons." To believe otherwise, he noted, it would be necessary to believe:
Given that the SEC was going forward with a trial against the individual charged, the idea "that we nonetheless intentionally settle the case against the company on the cheap because we just don’t like to try cases, or for other, even more ridiculous reasons" reflected a "fundamental misunderstanding about the professionalism and commitment of the SEC staff".
Khuzami's discussion reflects the complex considerations that go into settlements and the use the "neither admit nor deny" approach. The discussion demonstrates why implementation ought to be left to the Agency and the parties and not be a matter of judicial fiat.
]]>But more importantly, the reasoning of the case ultimately threatens to harm shareholders and investors by forcing the SEC to litigate more cases.
Litigation is expensive and uses up resources. The SEC has already had an exceptionally hard time getting an adequate budget out of Congress. To the extent having to litigate more cases, this would likely require the Agency to strip resources from other areas and other projects. Most logically, at least some of the funds would come out of the budget used to pay those who investigate possible violations. In short, there will be fewer investigations and fewer resources seeking the next Madoff.
Yet there is another even darker implication of this approach. Given that big financial institutions have an almost unlimited budget to pay attorneys, they can afford to litigate cases to the bitter end. Smaller entities and individuals may not have the same ability. The result might be fewer cases against large businesses.
And, indeed, this is something the WSJ implicitly suggested ought to happen. An editorial in the paper had this to say about the consequences of making the SEC litigate more cases.
To the extent that the SEC lost at trial, it might "cause the SEC to bring fewer of these grandstanding cases against the corporate villain of the moment—for now, it's Wall Street—and focus more on real financial criminals like Bernie Madoff."
In other words, by forcing more trials, the SEC would stop bringing cases against the "corporate villain of the moment." Instead, it ought to redirect its efforts not at Wall Street but at the Bernie Madoff's. Of course, Bernie Madoff would probably be surprised to learn that he was not part of Wall Street. But mostly the approach suggested by the editorial would result in fewer cases against large entities and more against smaller players in the securities markets. And, indeed, this is a possible outcome of the decision in Citigroup.
To some degree, the decision stands for the proposition that this type of language is never acceptable, at least where the relief is substantial. The court itself all but said this. See SEC v. Citigroup ("It is not reasonable, because how can it ever be reasonable to impose substantial relief on the basis of mere allegations?"). Of course, one could argue that injunctive relief enforced by contempt is always "substantial." Were this to be the case, the SEC could no longer rely on settlements of this kind.
This could significantly increase the number of cases that were litigated. Particularly where the SEC sought to charge a scienter based claim, defendants would have considerable incentive to litigate, either in an effort to win or to provide delay. Delay might, for example, give defendants time to settle any private litigation before there was a ruling in the SEC case. Because the SEC has limited resources, more litigation would mean less money for other administrative activities. The Commission could strip funds away from operating divisions and give them to Enforcement. Or Enforcement would, within its own budget, be forced to spend more on litigation and less on investigations.
Alternatively, the decision could paradoxically result in less protection for the public. This could push the SEC to bring more settlements as administrative proceedings. These proceedings are not subject to court approval. Moreover, because violations are not enforceable through contempt proceedings, the public arguably gets less protection.
Certainly, the same court's opinion in SEC v. Gupta suggested that the SEC should have a strategic justification selecting an injunctive versus administrative forum. Ease of negotiating and approving a settlement ought to qualify.
]]>The decision poses numerous problems for the Commission. For one thing, it is internally inconsistent.
The court characterized these settlements as having little evidentiary or other value. The criticism is overbroad. SEC cases provide can provide plaintiffs with a roadmap for their own action, often involve obtaining relief that cannot be obtained by private parties (as the court noted, the SEC can recover amounts for negligent behavior, private parties cannot), and they may have some evidentiary value. See THE ANSCHUTZ CORPORATION v. MERRILL LYNCH, 785 F. Supp. 2d 799, 821 (ND CA 2011)(declining to dismiss motion to strike references to various investigations and resulting settlements conducted by the New York Attorney General and the SEC because "regulatory investigations and settlements may be relevant to issues in this case").
But more importantly, even to the extent true, the court declined to approve the settlement because of its very importance. Thus, the SEC was seeking "substantial injunctive relief, enforced by the Court's own contempt power". Or, said another way, the SEC was asking the court "to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt". In other words, it was the serious impact of the settlement (which presumably equated to a public benefit) that required the court to insist on factual findings.
The court also effectively overstated the value of factual admissions. The parties could, for example, renegotiate the settlement and agree to a thin list of admissions. To the extent the SEC continued to charge Citigroup only with negligence under Section 17, private litigants would still have to prove scienter. To the extent the facts admitted merely established an aiding and abetting standard, private litigants would still have to prove a primary violation. In other words, the mere elimination of the "neither admit nor deny" language does not automatically result in substantial benefit to private litigants.
]]>It is clear that Judge Rakoff does not like the settlement on substantive grounds. He was unhappy with the amount (noting that investors lost $700 million) and viewd the settlement as inconsistent with the one reached in the Goldman case. See note 7. Nor was the court happy with the standard of fault charged in the complaint. Although language in the separate action against an individual "would appear to be tantamount to an allegation of knowing and fraudulent intent ("scienter," in the lingo of securities law), the S.E.C., for reasons of its own, chose to charge Citigroup only with negligence".
The rejection of the settlement, however, was not on this basis. Instead, the court rejected the settlement because it has not been provided with "any proven or admitted facts upon which to excercise even a modest degree of independent judgment." Said another way, the court did not approve the settlement because it allowed Citigroup to "neither admit nor deny" the allegations in the complaint (language that he suggested may violate the first amendment, see note 5). As the court reasoned:
In part the court based its reasoning on the perception that settlements involving the "neither admit nor deny" language had no public benefit. They had "no evidentiary value". They were often viewed by the business community "as a cost of doing business imposed by having to maintain a working relationship with a regulatory agency, rather than as any indication of where the real truth lies." This type of settlement served only the "various narrow interests of the parties." Moreover, the settlement interfered with the public's right to know the truth.
In effect, therefore, the court suggested that settlements, at least those involving "substantial relief", could not be approved where the defendant made no admissions of fact. Indeed, the court itself asked rhetorically, "how can it ever be reasonable to impose substantial relief on the basis of mere allegations?"
We'll consider the implications of this case in the next post. The opinion has been posted on the DU Corporate governance web site.
]]>The penalty was imposed in an order granting the SEC summary judgment in its civil suit against Rajaratnam. An injunction was a foregone conclusion. Given his criminal conviction, Rajaratnam "conceded that, because of the criminal conviction, he was collaterally estopped from contesting liability for insider trading on the five stocks here in issue, and that he did not oppose having an injunction entered against him based on this liability."
Moreover, given the $53.8 million forfeiture in the criminal case, the SEC conceded that its "request for $31.6 million in disgorgement was moot."
The only real issue was the amount of the penalty. Defendant essentially argued that, given the $38 million penalty imposed in the criminal case, "further civil penalties are unwarranted." Judge Rakoff, however, disagreed. Criminal penalties, according to the judge, were designed to address defendant's "moral blameworthiness." In contrast:
In calculating the penalty, the court agreed that the facts justified the highest possible penalty of three times the profit gained or loss avoided. Moreover, the court declined to reduce the penalty by amounts attributed not to insider trading but to the market. As the court reasoned:
The profits/losses did, however, have to be computed based upon the trading price of the relevant shares "a reasonable period after public dissemination of the nonpublic information." 15 USC 78u-1(f). Using 24 hours as a reasonable period, the Commission computed the gain/loss avoided as $33,512,929, while defendant came up with $30,935,235.
The court refused to resolve the discrepancy. The court simply determined that anything over $90 million was enough and, as a result, accepted the defendant's calculation since it yielded the requisite minimum penalty.
As for paying the $92,805,705, the court noted that certified check, bank cashier's check, or United States postal money order made payable to the United States Securities and Exchange Commission would be sufficient.
We will have Judge Rakoff's order posted shortly on the DU Corporate Governance web site.
]]>Clayton Peterson served on the board of directors for Mariner Energy Inc. (“Mariner”), a publicly traded oil and gas company. Apache Corporation (“Apache”), also a publicly traded oil and gas company, was expected to announce its acquisition of Mariner on April 15, 2010. The SEC alleged that Clayton Peterson gave his son material, non-public information about the acquisition prior to the announcement date. The SEC noted that Clayton Peterson specifically told his son to purchase shares of Mariner for family members. Acting on his father’s advice, Drew Peterson purchased Mariner’s securities for himself, relatives, the investment advisory firm where he was employed, and Blind Seven LLC, an investment club founded by Drew. Drew purchased 1,200 shares of Mariner for himself, 5,000 shares for his relatives, 2,500 shares for Blind Seven, 500 shares for a friend, and 4,100 shares for four of his clients.
Drew forwarded the tip about Apache’s acquisition of Mariner to a friend working as a portfolio manager at a registered investment advisor in Denver referred to as “Hedge Fund A Portfolio Manager” throughout the SEC’s complaint. Hedge Fund A’s Portfolio Manager purchased 200,000 shares of Mariner stock valued at $3.3 million and 5,000 option contracts on Mariner just days before the announcement. This was the first time Hedge Fund A had ever traded Mariner stock or options. The portfolio manager also purchased 25,000 shares of Mariner and 400 options contracts for relatives and his personal accounts.
Following the April 15th announcement of the acquisition, Mariner’s stock increased from $18.09 per share to $25.68 per share. Drew Peterson made over $100,000 in profits from his trades. Hedge Fund A made $4.6 million in profits while the portfolio manager made $435,000 for his relatives and himself.
The SEC claimed Defendants violated Section 10(b) of the Exchange Act and Rule 10(b)-5. The SEC’s complaint stated that Clayton Peterson “recklessly disregarded, or should have known, that he owed a fiduciary duty” to Mariner and the information about the acquisition was material, non-public information. The SEC applied this same standard to Drew Peterson and states that Drew “recklessly disregarded, or should have known” the tip his father gave him was inside information.
The SEC sought permanent enjoinment against Defendants from violating Section 10(b) and Rule 10(b)-5 again, civil monetary penalties, and disgorgement of all profits that resulted from the insider trading, including those profits gained by Hedge Fund A and the portfolio manager for a total of $5.2 million. The SEC also asked the court to bar Clayton Peterson from serving as an officer or director of any publicly traded company.
Both Clayton Peterson and Drew Peterson pled guilty to insider trading charges. Sentencing is on January 12, 2012. The probation office has recommended Clayton Peterson not receive any jail time as reported here.
The primary materials for this case may be found on the DU Corporate Governance website.
]]>The SEC claimed that Gateway’s CFO, Todd, and lead CPA, Manza, unlawfully misrepresented Gateway’s financial condition to meet earnings and revenue expectations in the third quarter of 2000. Their claims revolved around transactions between Gateway and Lockheed Martin, VenServ Inc., and AOL.
In 2000, according to the SEC, Gateway entered into an agreement with Lockheed Martin to sell $47.2 million of fixed assets in the form of IBM and Sun Microsystems servers. Gateway planned to then lease back the servers, booking the initial transaction as revenue. This technique was not in accordance with revenue recognition under Generally Accepted Accounting Principles (“GAAP”). Gateway booked this one time gain as revenue in its third quarter report. During that same quarter, Gateway included $21 million from a transaction with Venserv. However, when it was recorded, the Venserv sale was incomplete because Gateway did not fulfill the services stipulated in the contract. Gateway also modified the AOL agreement to be able to book revenue sooner, creating a one-time revenue boost during the third quarter of $72 million.
The Lockheed transaction involved the defendants recording the sale of fixed assets as revenue; Manza and Todd argued that the Lockheed transaction did not violate a specific provision of GAAP while the SEC presented experts that disputed that claim. However, Manza testified that while he did not believe their actions violated a specific GAAP provision, if he were the CFO he would not have recorded the transaction as revenue.
The SEC alleged that the actions constituted securities fraud under Rule 10b-5. Violations of § 10(b) of the Act require “a material representation, in connection with the purchase or sale of a security, with scienter, by means of interstate commerce.” SEC v. Dain Rauscher, Inc., 254 F.3d 852, 855-56 (9th Cir. 2001). The SEC also claimed that Todd and Manza’s signing of the management representation letter sent to Price Waterhouse Coopers amounted to a violation of rule 13b2-2 for improper reporting to accountants. Although the SEC prevailed at trial, the district court set aside the jury verdict, holding that the evidence was insufficient to establish scienter or the materiality of the alleged misstatements.
On appeal, the Ninth Circuit reversed. The appellate court found ample evidence in the Lockheed and VenServ transactions for the jury to have found a material misrepresentation. In the Lockheed transaction, the jury heard expert opinions of how the transaction should have been recorded as well as testimony that Gateway had violated its own internal accounting policy by booking the transaction as revenue. Both parties agreed that the Venserv transaction was not complete and improperly recognized.
With respect to scienter, the court held that the mental state embraced both an “intent to deceive, manipulate or defraud” and recklessness. In the Lockheed transaction, Todd and Manza allegedly kept information from their internal auditors because Manza said “they wouldn’t go for it.” In the Venserv transaction, evidence was presented which showed that the defendants knew the sale was incomplete at the time it was recognized.
A violation of rule 13b2-2 requires an officer to knowingly making a false or misleading statement to an accountant. The Ninth circuit found that the same evidence sufficient for scienter with regard to Section 10(b) violations was sufficient to show Todd and Manza knew the financial documents were not accurate when they signed the management representation letters.
The Ninth Circuit reversed the trial court’s grants of summary judgment for Weitzen with regard to his liability under § 10(b), Rule 10b-5, and control person liability under §20(a) of the Securities Act of 1933. Despite the nature of the transactions that were recorded in Gateway’s third quarter earnings report, Weitzen repeatedly referred to revenue growth as accelerated during conference calls with analysts. The court drew from this a genuine issue of material fact regarding whether Weitzen materially misrepresented Gateway’s revenue and acted with scienter in doing so. The court again found a genuine issue of fact as to whether Weitzen could be considered a “control person” with regard to Gateway. The control person must have power or control over the primary violator of the Act.
The Ninth Circuit upheld summary judgment for Weitzen with regard to the rule 13b2-2 claim of improperly reporting to accountants. The court also affirmed the district court’s order denying defendants Todd’s and Manza’s motions for a new trial and motions for judgment as a matter of law on aiding and abetting claims.
Further posts on SEC v. Todd can be found here.
The primary materials for this case may be found on the DU Corporate Governance website.
]]>The SEC won't seek en banc consideration of the DC Circuit's decision with respect to Rule14a-11 or review in the Supreme Court. It would have been a very difficult case to win in the DC Circuit since three of the nine judges could be counted on to oppose Commission efforts. Yet it leaves in place a very bad precedent that will come back to haunt the SEC with respect to future rulemaking efforts, particularly in the corporate governance area. We have a few more posts on the DC Circuit's decision and the extent to which it went beyond any other court in imposing cost-benefit burdens on the SEC.
As we have written before on this blog, this is access delayed, not access defeated.
]]>In addition, as we will note in later posts, the court erred in its analysis of the types of "costs" that the SEC must examine. The court assumed, wrongly, that boards had a duty to resist access candidates, equating the boards fiduciary obligations in those circumstances with those applicable during a proxy contest. The court also incorrectly required the SEC to assume that union pension plans would violate their fiduciary obligations by using access to benefit workers rather than plan beneficiaries. There is no support in the case law for either proposition.
]]>The allegations came from an attorney in the SEC but gained traction when Senator Grassley sent a letter to the Commission asking for information on the matter. The letter is here. The letter indicated that the SEC had destroyed documents in 9000 files (apparently over a 17 year period) and some of the filed involved high profile companies or persons (Madoff, a bunch of financial institutions).
In discussing this, lets first get the facts on the table. The destruction is alleged to have occurred with respect to Matters under Investigation or MUIs. What are these? They are preliminary examinations of tips and other allegations designed to determine whether the Division of Enforcement should engage in a full scale investigation.
The MUI process is informal. Staff engaging in a MUI does not have subpoena authority so the investigation cannot involve compelled production of documents or testimony (that only comes with a formal order). Moreover, the period of time for MUIs is brief. Under the internal policies of the SEC, a MUI is automatically converted into a full scale investigation after 60 days. See Enforcement Manual, at 17 ("The internal system will convert a MUI to an investigation when the MUI has been open for sixty days.").
The staff must, therefore, decide whether to terminate the preliminary investigation or upgrade it into a full investigation in a relative quick fashion. To the extent terminated, the staff must provide a written explanation for the reasons. Again, as the Enforcement Manual notes:
Enforcement Manual, at 19 (emphasis added). So the documents in the file may be destroyed but the file itself and an explanation for the decision to close the matter apparently remain in place.
Second, the US government requires the implementation of a "selective retention" policy. See 44 U.S.C. § 2905. Thus, not everything has to be retained. The Archives indicated that the records shouldn't have been destroyed but only because there had been no disposition schedule.
Third, in deciding what to retain, it bears recalling that the SEC receives a massive number of tips and referrals each year, somewhere around 30,000 a year (which are screened through the newly minted TRC database). It must first sift through these allegations and decide which ones require further attention. A certain number of them are investigated further and become MUIs. Within 60 days, a small percentage of the total become active investigations, somewhere around 500. Some percentage of the investigations result in actual cases. Somewhere along the spectrum of tips to cases, the SEC has to decide (in conjunction with the Archives) what to retain. Not retaining file documents in matters that never made it to a full scale investigation does not seem unreasonable.
Moreover, to the extent put in place 17 years ago, the policy arose before documents in electronic format became universal. As a result, retention meant hard copies. To keep all documents would have resulted in warehouses bursting with paper. Some type of cost-benefit analysis had to be made in determining what was retained.
Fourth, it is no great surprise that some well known names (Maddoff) or well known entities would appear in a list of closed MUIs. After all, there were 9000 of them. Presumably the larger the institution the greater the likelihood someone will complain to the SEC (and a MUI opened). But that inevitability is not a reason to suddenly retain all of the documents in 9000 files.
Apparently the SEC has now decided to retain documents obtained in MUIs that are later closed (as opposed to becoming full blown investigations). It is in fact the case that this may be appropriate, particularly given shifts in the cost-benefit analysis. In an era where electronic retention is prevalent, the cost of storage has gone way down. But to the extent the current criticism of the Commission provides an incentive (by the SEC and all other government agencies) to retain everything, without undertaking a cost-benefit analysis, the result will likely be a government wide retention policy that is overbroad and, in the aggregate, costly.
]]>The Commission did so only after Judge Rakoff allowed Gupta's case challenging the SEC's decision to bring an administrative rather than injunctive proceeding to go forward. The case likely gave Gupta and his counsel the opportunity to depose the staff at the SEC about their motivations for bringing the administrative proceeding, something that would potentially provide evidence useful in the administrative proceeding. We wrote a number of posts on this case.
The WSJ indicated that Gupta also intends to terminate his case against the SEC. As part of the settlement, the SEC agreed not to bring an administrative proceeding against Gupta. SeeWSJ ("As part of an agreement between the sides, the SEC said it wouldn't bring any administrative or cease-and-desist proceedings in the future against Mr. Gupta based on the allegations.").
To the extent the SEC wants to bring an action against Gupta, it will be limited to an injunctive proceeding in federal district court (apparently in Judge Rakoff's court). The Commission in dismissing the administrative proceeding left open this possibility. See Exchange Act Release No. 65037(August 4, 2011) ("The Commission has determined that it is in the public interest to dismiss these proceedings. Dismissing these proceedings will not prevent the Commission from filing an action against Mr. Gupta in United States District Court.").
The SEC terminated the administrative proceeding for one of two reasons. The SEC either viewed the case as weak (as Gupta asserts) and decided not to waste the resources on the matter, or terminated the administrative proceeding only to end Gupta's litigation. The reason will eventually become clear. Should the SEC file in federal district court, it will suggest that the agency viewed the case as strong on the merits but switched forums to end Gupta's litigation.
Whatever the reason for the termination of the administrative proceeding, the outcome of the case provides future defendants with an incentive to litigate against the agency in order to control the forum decision. In addition, the staff will likely have to take this possibility into consideration when selecting the forum. This is an unnecessary complication to an already complicated process.
]]>The trial court in Gupta v. SEC essentially validated equal protection claims by all parties dissatisfied with administrative proceedings. The court all but held that the SEC has no competency to resolve such challenges and that anyone consigned to the administrative process will be subject to an inferior forum. This went well beyond the analysis in FEF v. PCAOB. Nothing in that case suggested such a broad exception to the language in APA 703. Its one thing to allow a claim in a separate preceding that challenges the constitutionality of the relevant agency and another to allow a claim whenever a party alleges discrimination.
The analysis, therefore, provides an open invitation for any party with the resources to bring a parallel action in federal court. Moreover, while Gupta v. SEC involved a suit alleging unfairness in bringing an administrative proceeding, there is nothing in the court's analysis that prevents a party from alleging that the SEC's decision to bring a case in federal district court was also unfair. After all, there are advantages to the administrative process (inapplicability of the rules of evidence, a decision maker with substantive expertise, a typically quicker process, the lack of D&O bars, the inability to bring an action for contempt for violations).
The district court understood this implication and tried to sidestep it.
The analysis is weak on a number of counts. First, as a practical matter, the SEC never has and should not be required to justify the selection of a particular forum.
Second, requiring such a justification runs headlong into the confidentiality normally accorded the SEC's actions. When a proceeding against a party is announced, the SEC rightfully maintains confidentiality about non-public aspects of the case. The court is, however, suggesting that when the SEC announces what appears to be a different approach with respect to a party, it should give an explanation. The explanation will presumably involve a description of differences in the particular case, something that may require a violation of the traditional rule of confidentiality.
Third, the court is trying to limit the analysis to a case where there are other defendants treated differently. Yet many cases involve multiple defendants who are subjected to actions in different forums. Moreover, there is nothing that prevents parties from claiming that they were treated unequally when compared with parties in different actions. Thus, if the SEC ordinarily brings insider trading cases as injunctive proceedings, a party sued in an administrative action for insider trading can argue that he or she was treated unequally.
Fourth, the "harm" to Gupta (lack of a jury, lack of the rules of evidence, etc), applies in every administrative proceeding. To the extent the court truly thinks that Gupta is disadvantaged by being forced to litigate in an administrative forum, it is surely an argument that can be made in every single administrative case.
As a result of this reasoning, there are two likely outcomes. First, the number of parallel suits will increase dramatically. Why not? You can obtain discovery against the agency and explore the staff's motivations for bringing the relevant administrative proceeding. Even if the case is ultimately a loser, its possible that it will make available plenty of information useful in the administrative proceeding (and the eventual appeal to the US Court of Appeals). The increase in the number of suits will require the SEC to reallocate attorneys from the Division of Enforcement to the Office of the General Counsel, the office that defends actions filed against the Commission. Thus, the SEC will have to reduce resources used to investigate and enforce the securities laws.
The most important outcome, however, will likely be a further decline in moral at the SEC. After working hard on a case and deciding on a forum, attorneys in the Division of Enforcement will need to be prepared for litigation over the forum choice, including depositions and review of their emails and other internal records.
Leave the SEC to go work in the private sector and be investigated. Bring an action that results in a $550 million settlement and be investigated. Bring an action in a particular forum and be investigated. This can't be good for moral.
Primary materials in this case, including the court's opinion, can be found at the DU Corporate Governance web site.
]]>The case is not always clear but the trial judge apparently treated the retroactivity issue as one of constitutional dimension. As the opinion noted:
But the retroactivity issue goes to the relief, not the forum. To the extent that the court finds that the SEC cannot obtain penalties against Gupta, it does not preclude the SEC from bringing an enforcement action. Indeed, in the complaint, Gupta mostly argues that the application of the penalty provision is further evidence of his other constitutional claim, that he is being treated differently from the other defendants arising out of the same basic set of facts who have been subjected to proceedings by the SEC. See Gupta Brief ("The impact of this 'first use' is to single out Mr. Gupta as the only Galleon-related defendant being pursued by the Commission administratively in contrast to more than two dozen other Galleon-related defendants named in Commission complaints filed in this Court.").
The main constitutional claim discussed in the opinion is a violation of the equal protection clause. This arises out of the fact that Gupta was allegedly treated differently from other similar defendants. The difference in treatment, according to Gupta, resulted in considerable harm. He would be deprived of certain constitutional rights such as a right to a jury and certain other prophylactic safeguards such as the Federal Rules of Evidence. He is subjected to a short trial date. As the court noted:
But even if Gupta was singled out, that does necessarily establish a violation of the equal protection clause. The complaint does not allege that Gupta was treated differently because of race, gender, ethnicity or other categories that warrant some type of heightened review. Under traditional analysis, the SEC need only have a rational basis for any decision.
Moreover, this is not a case of selective prosecution. With 28 other persons having been sued based on similar allegations, the parties and the trial judge implicitly concede that the action could have (indeed, they suggest, should have) been filed in federal district court. Thus, the only issue is whether the SEC could have violated the equal protection clause by filing an action in a particular forum (in this case an administrative one).
In explaining the choice of forum, Paragraph 16 of the complaint states that the "only plausible inference is that the Commission is proceeding how and where it is against Mr. Gupta for the bad faith purpose of shoring up a meritless case by disarming its adversary." Stripped down to its essence, this is basically a claim that the SEC brought the action as an administrative proceeding because it thought it had a better chance of winning than in district court. It is, in short, a rational basis for the decision.
First, parties invariably consider the likelihood of victory when deciding on the forum. This can be true, for example, with respect to venue decisions. It is an ordinary part of the litigation process and hard to see as bad faith or irrational behavior.
Second, while the SEC did get to choose the forum, that does not mean it is able to shore up a meritless case. The Defendant can defend against the allegations and some of the matters mentioned (the inapplicability of the rules of evidence) may benefit Defendant more than the SEC. He also gets to appeal to the Commission (which is not united and therefore cannot be viewed as automatically willing to uphold an ALJ decision) and to the court of appeals. Presumably, these steps will weed out any "meritless cases."
Third, it is Gupta who gets to determine the relevant appellate court. He has the choice of bringing the appeal in the DC Circuit or the Circuit where he resides. See 15 U.S.C. § 78y(a) (1). Thus, while the SEC determines the initial forum (an administrative proceeding), Gupta can determine the relvant appellate court. Moreover, with the DC Circuit among the choices, he has available a court that has shown considerable willingness to overturn decisions of the Commission.
But mostly the claim has to fall because the case has not been made that an administrative proceeding is somehow inferior to an action in federal district court. Defendant's argument seems to be premised on the view that the procedures involved in administrative cases do not adequately protect against "meritless cases." In other words, those consigned to the administrative process have a greater likelihood of being wrongly convicted. But there is simply no evidence of this. Thus, while Gupta was consigned to a forum with a different set of procedures and requirements, it is not at all established that this somehow resulted in a greater risk that the SEC would prevail on a meritless case.
This claim falls squarely into the category of cases where the agency has almost unlimited discretion to make decisions about enforcement proceedings. See Heckler v. Chaney, 470 U.S. 821 (1985). For the most part, decisions about whether to bring an action or about whom to bring an ation against are unreviewable. Id. ("an agency decision not to enforce often involves a complicated balancing of a number of factors which are peculiarly within its expertise. Thus, the agency must not only assess whether a violation has occurred, but whether agency resources are best spent on this violation or another, whether the agency is likely to succeed if it acts, whether the particular enforcement action requested best fits the agency's overall policies, and, indeed, whether the agency has enough resources to undertake the action at all."). The decision by the SEC to bring an administrative proceeding, even if motivated by a desire to increase the likelihood of winning, is not a violation of the Equal Protection Clause.
The trial court did try to strengthen Defendant's argument by reading into the complaint the allegation that the SEC singled Gupta out for unequal treatment "in retaliation for his strenuous assertion of his innocence". See Complaint at P 16. The argument, however, is still premised on the idea that an the SEC chose to "punish" Gupta by selecting a forum where it believed it had a greater chance of winning. Such a justification is rational.
Primary materials in this case, including the court's opinion, can be found at the DU Corporate Governance web site.
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