You may remember Rajat Gupta, the former GS and P & G director the SEC accused in a March 1 administrative order of tipping inside info to Rajatnaram. I have previously discussed the many peculiarities of that case, including the fact that
the SEC chose this as the first insider trading case (and the first of the 26 Galleon related cases) to be brought under a new Dodd-Frank provision that gives the SEC the benefit of a “home court,” a lower evidentiary standard, and the opportunity to avoid judicial review. (Betcha didn’t know this was what Dodd-Frank was for). Yet just a few days later the SEC filed an insider trading case against a lawyer in federal court that involved only $27,400, much less than R supposedly made off Gupta’s information.
I suggested the SEC might be trying to rig the Raj trial by “tainting a key witness?” I noted that this wouldn’t be the first time the government has tried this, and that
such abuse is a foreseeable result of giving great power to lightly supervised government agents. If we’re going to keep passing financial laws that beef up the SEC’s power, we need to watch carefully how that power is exercised.
Well, somebody is watching — Judge Jed Rakoff, who has ruled (HT Dealbook) that Gupta’s equal protection claim against the SEC can proceed. The judge was wary of the extraordinary nature of this complaint, observing that “it would not be prudent to allow every subject of an SEC enforcement action who alleges ‘bad faith’ and ‘selective prosecution’ to be able to create a diversion by bringing a parallel action in federal district court.” However, the court concluded:
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 S.E.C., even in their instant papers, as to why this should be so. A fear of abuse by litigants in other cases should never deter a federal court from its unfailing duty to provide a forum for vindication of constitutional protections to those who can make a substantial showing that they have indeed been denied their rights.
In other words, so low has the SEC — the agency charged with protecting the financial markets — sunk in this judge’s estimation that it is now deemed worthy of an unusual form of judicial supervision.