Gupta’s lawyer, Gary Naftalis, said such SEC actions also give unfair evidentiary advantages to the government because the administrative law judge was allowed to consider hearsay -- evidence that may only be indirect or speculative and would rarely be allowed in a formal court setting.
U.S. District Judge Jed Rakoff in Manhattan, who presided over Gupta’s lawsuit against the SEC, noted that more than a dozen people tied to the Rajaratnam case had been sued by the SEC in federal court in New York, and called the SEC’s administrative action against Gupta “bizarre.”
The SEC and Gupta later agreed to drop their respective legal actions and stipulated that Rakoff would preside over an SEC lawsuit if it was filed. Two months later, in October 2011, Gupta was instead charged with insider trading by prosecutors, as well as sued by the SEC. He was convicted and sentenced to two years in prison, and is free while he appeals. Rakoff last week ordered him to pay $13.9 million in the SEC case.
Bolster Success
The SEC chose to move against Cohen in an administrative proceeding to bolster its chances of success, lawyers said.
“They are doing that to get the home court advantage, as in an administrative proceeding there is more procedural informality and the federal rules of evidence do not apply,” Columbia’s John Coffee said. “They are also more comfortable with who the judge will be.”
Bypassing the courtroom has built-in advantages for the SEC, said Sale of Washington University.
“Administrative proceedings are on the SEC’s own territory,” she said. “Cohen can always appeal it to court down the road, but this gives the SEC the opportunity to manage this in-house.”
The downside of an administrative proceeding for the SEC is the lack of any stiff financial penalties that would ensue from a successful lawsuit.
Since Cohen agreed in March to pay $616 million to end allegations tied to the July 2008 drug company trades, financial penalties are less of a priority for the regulator in this matter, said a person familiar with the matter who requested anonymity because the matter isn’t public. As part of the March agreement, Cohen’s funds would neither admit nor deny the allegations of wrongdoing.