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News March 28, 2011 Issue

Ex-Goldman Director Challenges SEC Use Of New Dodd-Frank Authority

Rajat Gupta, a former Goldman Sachs director, is the subject of an SEC civil administrative action accusing him of passing inside information to Galleonís Raj Rajaratnam.

That may not sound so surprising these days, but it is actually very unique. Gupta is the first, or at least one of the first, non-SEC registered person(s) to be charged in an SEC administrative proceeding. Before the Dodd-Frank Act became law, the SEC had to bring civil actions in federal district court against non-SEC registered persons accused of violating the federal securities laws. Administrative proceedings were available only against registered persons (i.e., registered persons and entities and their associated persons) who, by registering, had agreed to be subject to the administrative process.

The Dodd-Frank Act changed all that. Section 929P now authorizes the SEC to institute administrative proceedings against anyone alleged to have violated the federal securities laws. (This is also the section that confers extraterritorial jurisdiction on the SEC to pursue securities fraud activity with respect to foreign securities and investors that takes place in the U.S., but thatís another story.)

Gupta is suing the SEC, claiming the administrative action will deny him the right to a jury trial and the advantages of the federal discovery process and evidence rules. One of Guptaís claims is that the SEC canít use its Dodd-Frank Act authority retroactively to reach back to pre-Dodd-Frank Act enactment activity.  

The SEC lost the retroactivity argument once already in the Morgan Keegan Asset Management administrative proceeding last year. The facts were a little different there Ė the SEC was resisting discovery based on Dodd-Frank Act authority Ė and the SEC asserted its ability to do so before the statute was signed into law. The section conferring the particular authority at issue has since been surgically excised from the Dodd-Frank Act.  

At the Practicing Law Instituteís annual SEC Speaks conference this year, Commissioner Kathleen Casey devoted a significant portion of her remarks to the issue of the retroactive application of the new Dodd-Frank Actís provisions. She outlined a series of actions that underscored the general principle of non-retroactivity, but allowed that the adoption of this aggressive and far-reaching legislation provides another opportunity to spawn litigation going forward.

Congress has periodically granted the Commission new authorities concerning the charges it may bring and the remedies it may seek or impose, Casey observed. "Each time Congress does this, it raises a question as to whether the new authorities may be applied to conduct that pre-dated the enactment of the statute. In some instances, the answer may be obvious; however, in many instances, the issue of retroactivity can pose difficult legal and policy questions for the Commission," she said.

Guptaís best argument, observed one senior securities litigator, is that the Dodd-Frank Act is not retroactive. Why? Because post-Dodd-Frank, said the lawyer, ANYONE can be the subject of SEC administrative proceedings.