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Quoted in Publication

Dow Jones article quotes Jeff Ifrah on case against former Goldman Sachs director Gupta

By Suzanne Barlyn

A DOW JONES NEWSWIRES COLUMN

NEW YORK (Dow Jones)–An insider-trading case against a former Goldman Sachs Group Inc. (GS) director could signal a shift in how the Securities and Exchange Commission handles certain enforcement actions.

Former Goldman director, Rajat Gupta, is battling the SEC over a civil administrative action the agency filed against him in March. It accused Gupta of allegedly sharing inside information with Galleon Group founder Raj Rajaratnam, who is on trial in a New York federal court for insider-trading. Gupta’s case, however, will be heard by an SEC administrative law judge, if the agency has its way.

A favorable outcome for the SEC against Gupta could bring it a step closer to broader reliance on a process that is often more efficient for the agency than court proceedings, according to lawyers.

Civil administrative proceedings in insider-trading cases are extremely rare, say lawyers. The SEC typically handles insider-trading cases as civil matters in federal court, they say. The Dodd Frank financial-overhaul law, however, expands the SEC’s powers to seek civil penalties through administrative cease-and-desist proceedings, which are typically conducted within the agency itself. A cease-and-desist action is aimed at stopping alleged wrongdoing, such selling fraudulent securities.

“We should be exploring opportunities to bring more administrative proceedings,” said George Canellos, regional director of the SEC’s New York regional office at seminar on April 29 sponsored by the Practising Law Institute in New York.

The outcome of Gupta’s case, however, could become a factor in that goal. Gupta filed a lawsuit against the SEC in March asking a New York federal court to halt the agency’s administrative case. An administrative hearing, instead of a civil court proceeding, would deprive Gupta of his right to a jury trial and other due process safeguards, his lawyers wrote in court documents. The SEC, in April, asked the court to throw out Gupta’s lawsuit. The case is pending.

The agency’s new authority under the Dodd Frank reforms includes allowing it to combine certain actions in administrative proceedings for the same defendant that it previously had to split between an administrative judge and a court.

Defendants, however, have far fewer rights, say lawyers. An administrative judge employed by the agency decides the case, instead of a jury. Access to certain evidence before the hearing, such as the details of a long investigation that lead to the charges, is also limited. An upside is that an administrative proceeding can wrap up within months instead of dragging on for years in the court system.

“I do think the SEC has a home-court advantage in the majority of cases in an administrative proceeding,” said Stan Twardy, a white-collar defense lawyer for Day Pitney LLP in Stamford, Conn. and a former U.S. Attorney. The process benefits some defendants, however, especially in technical cases that require a securities background to understand, he says.
The appeals process for administrative rulings can be another advantage to defendants, says A. Jeff Ifrah, a white collar defense lawyer for Ifrah PLLC in Washington, D.C. Administrative decisions must be supported by “substantial evidence.” The standard is often difficult for an agency to demonstrate on appeal, especially in insider-trading cases, which typically hinge on the a trader’s intent during a specific trade, says Ifrah.

Appeals of administrative rulings by defendants could eventually lead to a series of legal decisions that explain how the SEC can, and can’t, use the proceedings, says Barry Pollock, a white-collar-defense lawyer for Miller & Chevalier Chartered in Washington, D.C. “But until you have enough of them, it’s going to be an unpredictable process,” he says.