Should Dodd-Frank Be Applied Retroactively?

The SEC is seeking civil penalties from Rajat K. Gupta, a former director of Goldman Sachs for alleged insider trading. The SEC has not sued in federal court, but, rather has filed an administrative proceeding against Mr. Gupta as authorized by the new Dodd-Frank Act.

Rajat K. Gupta, a former director of Goldman Sachs, sued the SEC in the U.S. District Court for the Southern District Of New York, 11-CV-1900 on March 18, 2011, claiming that the administrative action by the SEC against him is unconstitutional because it seeks to retroactively apply provisions of Dodd-Frank § 929P, which amended § 8A of the Securities Act of 1933. In other words, Mr. Gupta is arguing that the alleged violations took place before Dodd-Frank was enacted so the SEC cannot use an administrative proceeding.

According Mr. Gupta's Complaint, there is no expression of Congressional Intent that civil penalties provision of Dodd-Frank can be applied retroactively. Section 4 of Dodd-Frank provides that “except as otherwise provided this Act shall take effect one day after the enactment of the Act.” Dodd-Frank became law on July 21, 2010. All of the conduct alleged occurred prior to that date. Without retroactive application of Dodd-Frank, the Commission could have sought civil penalties against Gupta in a Federal District Court.

The SEC alleged that Mr. Gupta engaged in a trading scheme by providing material non-public information that he obtained in the course of his duties as a member of the Board of Directors of The Goldman Sachs Group, Inc. and Procter & Gamble to Raj Rjaratnam, the manager of a hedge fund called Galleon Management, LP. Currently, Mr. Rjaratnam is on trial for criminal charges brought against him by the U.S. Attorney of the Southern District of New York.

Mr. Gupta claims that the actions brought against him should be determined by a jury. He points out that an appeal from an adverse administrative finding would first be to the Commission itself before any further judicial review. Mr. Gupta claims that he would be deprived of the application of the Federal Rules of Evidence which preclude unreliable evidence such as multiple layers of hearsay that Commission would seek to offer in an administrative proceeding. Also it would impede Mr. Gupta’s ability to seek indemnification for contribution thereby unfairly enhancing the magnitude of the amounts for which he would be exposed. These charges resulting from retroactive application of Dodd-Frank impose new legal consequences on Mr. Gupta even though arising from pre-Dodd-Frank conduct. Mr. Gupta points out that at least one Commissioner, Kathleen L. Casey, has publicly questioned the retroactive application of Dodd-Frank.

Mr. Gupta alleges that his attorney filed a 35-page response to a Wells Notice on Monday February 28, 2011. By that afternoon the staff received authorization to proceed against Mr. Gupta even though there is no record that the Commission met to consider the submission of the Wells response. Further, Mr. Gupta alleges that a copy of the submission was turned over by the Staff to the United States Attorney’s Office for use in the prosecution of Mr. Rajaratnam. Mr. Gupta seeks as a remedy (a) that Dodd-Frank provisions prospectively empowering the Commission to seek civil penalties against non-registered persons in administrative proceedings in lieu of a plenary action in Federal Court cannot be applied against him, and (b) the Commission is acting in bad faith and a discriminatory manner against him.

Mr. Gupta has raised significant legal issues which will apparently be decided in the very near future.

Edward X. Clinton, Sr.