Gupta v. Securities and Exchange Commission

Filing 16

MEMORANDUM OF LAW in Opposition re: 10 MOTION to Dismiss Complaint. /Memorandum of Law of Plaintiff Rajat K. Gupta in Opposition to Defendant's Motion To Dismiss Complaint. Document filed by Rajat K. Gupta. (Attachments: # 1 Exhibit A, # 2 Exhibit B)(Naftalis, Gary)

UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
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:
RAJAT K. GUPTA,
:
:
: No. 11-cv-1900 (JSR)
Plaintiff,
:
v.
:
:
SECURITIES AND EXCHANGE COMMISSION,
: April 11, 2011
:
:
Defendant.
:
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MEMORANDUM OF LAW OF PLAINTIFF RAJAT K. GUPTA
IN OPPOSITION TO DEFENDANT’S MOTION TO DISMISS COMPLAINT

KRAMER LEVIN NAFTALIS & FRANKEL LLP
Gary P. Naftalis
Michael S. Oberman
Alan R. Friedman
David S. Frankel
Robin M. Wilcox
Michael J. Sternhell
1177 Avenue of the Americas
New York, New York 10036
[phone]
Attorneys for Plaintiff Rajat K. Gupta

Table of Contents
Page
Table of Authorities ........................................................................................................................ ii
Preliminary Statement......................................................................................................................1
Argument .........................................................................................................................................5
I.

THE COURT HAS SUBJECT MATTER JURISDICTION OVER
THE FEDERAL QUESTIONS RAISED IN THIS ACTION.............................................5
A.

Subject Matter Jurisdiction Exists Under § 1331 ....................................................5

B.

Sovereign Immunity Has Been Waived By APA § 702 ..........................................6
1.
2.

Adjudication of Mr. Gupta’s Claims Would Be
Outside of the Commission’s Expertise.....................................................12

3.
II.

Mr. Gupta Could Not Obtain Meaningful Review
In a Court of Appeals.................................................................................11

Mr. Gupta’s Claims Are Collateral to Section 25(a) .................................14

THE EXHAUSTION AND RIPENESS DOCTRINES ARE
INAPPLICABLE TO THIS CASE....................................................................................16

Conclusion .....................................................................................................................................20
Statutory Appendix ..................................................................................................................... A-1
Speech by SEC Staff: Remarks at SIFMA’s Compliance and Legal Society Annual Seminar,
by Robert Khuzami, Director, Division of Enforcement, U.S. Securities and Exchange
Commission (March 23, 2011) ....................................................................................Exhibit A
Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. Law 111-203, Section 929P, 124 Stat. 1376, 1862-65 (2010) ............................ Exhibit B

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Table of Authorities
Page(s)
Cases
Adkins v. Rumsfeld,
389 F. Supp. 2d 579 (D. Del. 2005).........................................................................................12
Altman v. S.E.C.,
2011 WL 781918 (S.D.N.Y. Mar. 6, 2011) .........................................................................3, 15
Aquavella v. Richardson,
437 F.2d 397 (2d Cir. 1971).....................................................................................................18
Athlone Ind., Inc. v. Consumer Product Safety Comm'n,
707 F.2d 1485 (1983).........................................................................................................16, 17
Atlantic Richfield Co. v. U.S. Dep’t of Energy,
769 F.2d 771 (D.C. Cir. 1984) .................................................................................................18
Bastek v. Fed. Crop Ins. Corp.,
145 F.3d 90 (2d Cir. 1998).......................................................................................................16
Bowen v. Massachusetts,
487 U.S. 879 (1988) ..................................................................................................................6
Califano v. Sanders,
430 U.S. 99 (1977).....................................................................................................................5
City of New York v. U.S. Dep’t of Commerce,
739 F. Supp. 761 (E.D.N.Y. 1990) ..........................................................................................18
Commonwealth of Puerto Rico v. United States,
490 F.3d 50 (1st Cir. 2007)........................................................................................................7
Empire Healthchoice Assur., Inc. v. McVeigh,
547 U.S. 677 (2006)...................................................................................................................5
Fed. Trade Comm’n v. Standard Oil Co. of Cal.,
449 U.S. 232 (1980)...............................................................................................................8, 9
Free Enterprise Fund v. Public Co. Accounting Oversight Bd.,
130 S.Ct. 3138 (2010)...................................................................................................... passim
In the Matter of Jeffrey L. Feldman,
Admin. Proc. File No. 3-8063, 1994 SEC LEXIS 186 (Jan. 14, 1994) ...................................11

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Table of Authorities (Cont’d)
Page(s)
Merritt v. Shuttle, Inc.,
245 F.3d 182 (2d Cir. 2001)...............................................................................................15 n.6
Presbyterian Church (U.S.A.) v. United States,
870 F.2d 518 (9th Cir. 1989) .....................................................................................................7
Raz v. Lee,
343 F.3d 936 (8th Cir. 2003) .....................................................................................................7
Sharkey v. Quarantillo,
541 F.3d 75 (2d Cir. 2008)...................................................................................................7, 18
Thunder Basin Coal Co. v. Reich,
501 U.S. 200 (1994)............................................................................................... 10-12, 13 n.5
Touche Ross & Co. v. S.E.C.,
609 F.2d 570 (2d Cir. 1979).........................................................................................14, 16, 17
Trudeau v. Fed. Trade Comm'n,
456 F.3d 178 (D.C. Cir. 2006) ...............................................................................................7, 8
United States v. City of Detroit,
329 F.3d 515 (6th Cir. 2003) .....................................................................................................7
Up State Federal Credit Union v. Walker,
198 F.3d 372 (2d Cir. 1999).......................................................................................................7

Docketed Cases
S.E.C. v. Carroll,
No. 3:11-cv-00165-JGH (W.D. Ky. Mar. 17, 2011)............................................................4 n.2
S.E.C. v. Kluger,
No. 2:11-cv-01936-KSH-PS (D. N.J. Apr. 6, 2011)............................................................4 n.2
S.E.C. v. Liang,
No. 8:11-cv-00819-RWT (D. Md. Mar. 29, 2011) ..............................................................4 n.2
S.E.C. v. Treadway,
No. 1:11-cv-01534-RJH (S.D.N.Y. Mar. 7, 2011) ..............................................................4 n.2

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Table of Authorities (Cont’d)
Page(s)
Statutes
5 U.S.C. § 702..........................................................................................................................2, 6, 8
5 U.S.C. § 703..................................................................................................................................2
5 U.S.C. § 704........................................................................................................................2, 8, 11
15 U.S.C. § 78y................................................................................................................................9
28 U.S.C. § 1331......................................................................................................................1, 5, 6
28 U.S.C. § 2201..........................................................................................................................1, 6
Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. Law 111-203, Section 929P, 124 Stat. 1376, 1862-65 (2010) .................. 4 n.1, 18, Ex. B
Rules
Fed. R. Civ. P. 12(b)(1)....................................................................................................................1
Fed. R. Civ. P. 12(b)(6)..........................................................................................................1, 5 n.3

Miscellaneous
13B Wright & Miller, Fed. Prac. & Proc. Juris. § 3521 (3d ed.)...................................................18

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Plaintiff Rajat K. Gupta respectfully submits this memorandum of law in
opposition to the Securities and Exchange Commission’s motion to dismiss the Complaint under
Fed. R. Civ. P. 12(b)(1) and (6).
Preliminary Statement
On March 1, 2011, the Commission took the unprecedented step of instituting an
administrative proceeding for civil penalties alleging insider trading against a non-regulated
person. This is not just Mr. Gupta’s characterization of the Commission’s order instituting
proceedings (“OIP”); in a March 23, 2011 speech, Director of Enforcement Robert Khuzami
lauded the Gupta case as “the first use by the SEC of its new authority under Dodd-Frank to
obtain penalties in an Administrative Proceeding against persons not associated with a
regulated entity.” (Ex. A hereto) (emphasis added). The impact of this “first use” is to single
out Mr. Gupta as the only Galleon-related defendant being pursued by the Commission
administratively in contrast to more than two dozen other Galleon-related defendants named in
Commission complaints filed in this Court. In other — and more important — words, Mr. Gupta
is the only Galleon-related defendant faced with the denial of the right to a jury and important
procedural protections available only in federal court.
Without denying its disparate treatment of Mr. Gupta and without offering any, let
alone a legitimate, reason for it, the Commission argues that this Court is without power to
review — and, if warranted, remedy — the disparate treatment. But subject matter jurisdiction
exists under 28 U.S.C. § 1331 to hear this action for declaratory judgment brought under § 2201.
The Commission’s jurisdictional challenge rests only on its assertion that it has not waived
sovereign immunity as to Mr. Gupta’s claims, and its invocation of the doctrines of exhaustion
and ripeness. The grounds for this motion all fail.

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Section 702 of the APA waives sovereign immunity as to all actions against
federal agencies seeking relief “other than money damages,” whether a claim is asserted under
the APA or not: that is what the case law holds. This waiver is not restricted by the “final
agency action” requirement of § 704 applicable to claims asserted under the APA (which Mr.
Gupta’s are not), nor does § 703 limit Mr. Gupta to relief under the “special statutory review
proceeding” of Section 25(a) of the Exchange Act. Mr. Gupta is not invoking Section 25(a)
because he is not challenging a final order of the Commission imposing a sanction for violations
of the securities laws. He is seeking equitable relief to prevent an impermissible retroactive
application of Dodd-Frank and a violation of his constitutional rights.
Just last term, the Commission presented its Section 25(a) argument to the
Supreme Court, and the Court rejected it. The Court held that Section 25(a) “does not expressly
limit the jurisdiction that other statutes confer on district courts” (citing § 1331 and § 2201),
“[n]or does it do so implicitly.” Free Enterprise Fund v. Public Co. Accounting Oversight Bd.,
130 S.Ct. 3138, 3150 (2010) (emphasis added). In addition, the Court found a presumption
against such jurisdictional limitations over collateral challenges to agency action when, as here,
jurisdictional preclusion would “‘foreclose all meaningful judicial review’” and a plaintiff’s
claims are “‘outside the agency’s expertise.’” Id. (citation omitted).
In addressing Free Enterprise, the motion virtually ignores Mr. Gupta’s equal
protection challenge to the Commission’s discriminatory selection of forum. More troubling, the
motion suggests, misleadingly, that the procedural protections afforded respondents in SEC
administrative proceedings are equivalent to those in federal court — when they are not. The
SEC Rules of Practice nowhere provide for discovery depositions or for strict adherence to the
Federal Rules of Evidence, a critical procedural distinction because the Commission’s case as

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alleged in the OIP appears to depend largely on a few ambiguous phone records and hearsay
conversations (including triple levels of hearsay). If there were truly no difference in proceeding
administratively or in federal court, the Commission’s unexplained decision to subject Mr. Gupta
alone to its “first use” of Dodd-Frank becomes all the more perplexing.
The Commission heavily relies on Judge Holwell’s recent decision in Altman v.
S.E.C., 2011 WL 781918 (S.D.N.Y. Mar. 6, 2011), when arguing that Section 25(a) excludes
district court jurisdiction. But Altman turned on a wholly different set of facts — a challenge to
a Commission sanction imposed at the conclusion of administrative proceedings by an attorney
who had suborned perjury in an investigation by the Commission itself. In all events, Altman
cannot trump the Supreme Court’s reading of the words of Section 25(a) in Free Enterprise.
The Commission — for purposes of this motion — does not dispute Mr. Gupta’s
allegations showing that the Commission is impermissibly applying Dodd-Frank retroactively
against him and has acted towards him with discriminatory purpose and effect. Indeed, the
Commission does not dispute that — but for Dodd-Frank — it would have brought suit against
Mr. Gupta for civil penalties in federal court (as opposed to proceeding administratively against
him without seeking civil penalties); Mr. Khuzami’s speech precludes any challenge to this fact.
The issue of retroactivity is accordingly neither contingent nor unripe; it is only because of its
attempted retroactive application of Dodd-Frank that the Commission issued the OIP instead of
filing a complaint in this Court.1

1

The Commission, in its page 4 chart, invites the Court to conclude that parts of its case
against Mr. Gupta could have been brought administratively without enactment of Dodd-Frank,
but the chart rests on an unstated — and inaccurate — factual premise: that Mr. Gupta is a
regulated person. Prior to Dodd-Frank, civil penalties under Section 21B(e) of the Exchange
Act, Section 203(i) of the Investment Advisers Act and Section 9(d) of the Investment Company
Act could be imposed in SEC administrative proceedings only against persons associated with,
respectively, broker-dealers, investment advisers and investment companies. Paragraph 4 of the
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And Mr. Gupta is already sustaining injury as a result of the Commission’s
actions, which include the Commission’s decision to file and announce publicly administrative
proceedings against him less than two business days after receiving his Wells submission and
only a week before the start of the criminal trial of Raj Rajaratnam. Mr. Gupta alone faces an
imminent administrative proceeding seeking civil penalties for insider trading, with a firm July
18, 2011 date for the start of hearings — even as the Commission continues after the OIP to sue
other persons for insider trading in federal court.2 Mr. Gupta chose neither that date nor that
forum. The Commission put the administrative proceeding in motion, and the Commission
cannot escape prompt judicial review when this action provides Mr. Gupta with the only viable
forum for adjudicating his claims and when any delay in judicial review would only deepen his
injury. Neither exhaustion nor ripeness constitutes a serious defense.
The Commission contends that Mr. “Gupta provides no reason to believe that the
SEC will disregard any meritorious due process argument.” (Br. at 23). But Paragraph 19 of the
Complaint provided compelling reasons for such a belief:
The Commission’s order has all of the markings of a strategic
decision, and it is a foregone conclusion that the Commission
would decline to change course. Assuming it adhered to its own
procedures, the Commission itself approved of this choice of
forum. The Commission has already acted arbitrarily against Mr.
Gupta: The Staff and the Commission effectively deprived Mr.
Gupta of a full and fair Wells submission process.

Complaint alleges that Mr. Gupta “is not a regulated person under the federal securities laws,” an
allegation that now must be accepted as true on this motion. Attached as Ex. B is § 929P of
Dodd-Frank, showing the statutory amendments to the provisions included in the Commission’s
chart.
2

See S.E.C. v. Treadway, No. 11-cv-01534-RJH (S.D.N.Y. Mar. 7, 2011); S.E.C. v.
Carroll, No. 3:11-cv-00165-JGH (W.D. Ky. Mar. 17, 2011); S.E.C. v. Liang, No, 8:11-cv00819-RWT (D. Md. Mar. 29, 2011); S.E.C. v. Kluger, No. 2:11-cv-01936-KSH-PS (D. N.J.
Apr. 6, 2011).

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Beyond these reasons, it is simply too much to imagine that the Commission would ever rule in
an administrative proceeding that the Commission itself has impermissibly applied Dodd-Frank
retroactively against Mr. Gupta and acted in bad faith in denying him equal protection under law.
The Commission’s failure even to acknowledge the quoted allegations from Paragraph 19 of the
Complaint when it represented to the Court that “Mr. Gupta provides no reason to believe that
the SEC will disregard any meritorious due process argument” proves at once that the
Commission would quickly reject any allegations about its own conduct and that judicial review
of the OIP is urgent.3
Argument
I.

THE COURT HAS SUBJECT MATTER JURISDICTION OVER
THE FEDERAL QUESTIONS RAISED IN THIS ACTION
A.

Subject Matter Jurisdiction Exists Under § 1331
To establish subject matter jurisdiction under § 1331, a plaintiff must assert

claims arising under the Constitution or “Laws of the United States.” Empire Healthchoice
Assur., Inc. v. McVeigh, 547 U.S. 677, 678 (2006) (“[a] case ‘aris[es] under’ federal law within
the meaning of § 1331 . . . if ‘a well-pleaded complaint establishes either that federal law creates
the cause of action or that the plaintiff’s right to relief necessarily depends on resolution of a
substantial question of federal law.’”) (citation omitted). The Supreme Court has also held that,
subject only to preclusion-of-review statutes, district court jurisdiction to review agency action is
conferred by § 1331. See Califano v. Sanders, 430 U.S. 99, 104-07 (1977).

3

Bypassing the Court’s pre-motion rules, the Commission tacks on a 12(b)(6) prong in its
motion, asserting that the Complaint fails to allege facts that warrant the remedy of injunctive
relief. Suffice it to say that the Commission does not even attempt to show a failure to state a
claim for declaratory relief based on Mr. Gupta’s equal protection and retroactivity allegations
— allegations which, if proven, would clearly support injunctive relief.

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This action presents two questions for declaratory judgment: (1) whether the
Commission is violating Mr. Gupta’s equal protection rights by treating him differently from all
of the other Galleon-related defendants charged in federal court; and (2) whether the
Commission is improperly applying Dodd-Frank retroactively against Mr. Gupta.

The

Complaint pleads claims “arising under” the Constitution and “Laws of the United States,” and
the Commission does not contend otherwise. This Court therefore has subject matter jurisdiction
under § 1331 to grant declaratory relief under § 2201. See Free Enterprise, 130 S.Ct. at 3150
(sustaining jurisdiction and citing §§ 1331 and 2201).4
B.

Sovereign Immunity Has Been Waived By APA § 702
Section 702 of the APA is the short and dispositive answer to the Commission’s

sovereign immunity defense. The statute provides in pertinent part:
A person suffering legal wrong because of agency action, or
adversely affected or aggrieved by agency action within the
meaning of a relevant statute, is entitled to judicial review thereof.
An action in a court of the United States seeking relief other than
money damages and stating a claim that an agency or an officer or
employee thereof acted or failed to act in an official capacity or
under color of legal authority shall not be dismissed nor relief
therein be denied on the ground that it is against the United States
or that the United States is an indispensable party. . . . Nothing
herein (1) affects other limitations on judicial review or the power
or duty of the court to dismiss any action or deny relief on any
other appropriate legal or equitable ground; or (2) confers authority
to grant relief if any other statute that grants consent to suit
expressly or impliedly forbids the relief which is sought.
A consistent body of case law applying § 702 holds that sovereign immunity is
waived for “complaints [seeking] declaratory and injunctive relief,” because they are “certainly
not actions for money damages.” Bowen v. Massachusetts, 487 U.S. 879, 893 (1988). See also
4

Because § 1331 is a basis for subject matter jurisdiction and § 702 of the APA waives
sovereign immunity, the Court need not reach the other bases pled in paragraph 3 of the
Complaint.

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Sharkey v. Quarantillo, 541 F.3d 75, 91 (2d Cir. 2008) (“Section 702 of the APA waives the
federal government’s sovereign immunity in actions [for non-monetary relief against an agency]
brought under the general federal question jurisdictional statute.”) (citation and quotation marks
omitted); Raz v. Lee, 343 F.3d 936, 938 (8th Cir. 2003) (same); Presbyterian Church (U.S.A.) v.
United States, 870 F.2d 518, 524-25 (9th Cir. 1989) (same).
Consistent case law further teaches that “the APA’s waiver of sovereign
immunity applies to any suit whether under the APA or not” because § 702 “waives sovereign
immunity for [any] action in a court of the United States seeking relief other than money
damages, not [solely] for an action brought under the APA.” Trudeau v. Fed. Trade Comm’n,
456 F.3d 178, 186 (D.C. Cir. 2006) (citation, quotation marks, and alterations omitted). See also
Up State Federal Credit Union v. Walker, 198 F.3d 372, 375 (2d Cir. 1999) (unless exceptions in
last sentence of § 702 apply, “the APA does create a general waiver of sovereign immunity as to
equitable claims against government agencies”); Commonwealth of Puerto Rico v. United States,
490 F.3d 50, 57-58 (1st Cir. 2007) (“This waiver is for ‘all equitable actions for specific relief
against a Federal agency . . . ,’ and thus ‘applies to any suit whether under the APA or not.’”)
(quoting Trudeau, 456 F.3d at 186)); United States v. City of Detroit, 329 F.3d 515, 520-21 (6th
Cir. 2003) (en banc) (holding that “the waiver of sovereign immunity in section 702 [applies] in
cases brought under statutes other than the APA” and noting that five other circuits have so
held). This reading is supported by the legislative history of § 702 (as described by Trudeau,
456 F.3d at 186-87):
[T]he Senate Report [on the 1976 amendment] plainly indicated
that Congress expected the waiver to apply to nonstatutory actions,
and thus not only to actions under the APA. “The committee does
not believe,” the Report stated, that the amendment’s “partial
elimination of sovereign immunity, as a barrier to nonstatutory
review of Federal administrative action, will create undue

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interference with administrative action.” S. REP. NO. 94-996, at
8, 1976 U.S. Code Cong. & Ad.News, at 6129.
In Trudeau, the plaintiff sued the Federal Trade Commission challenging the
veracity of an FTC press release. Trudeau sought only declaratory and injunctive relief, and the
D.C. Circuit concluded that “there is no doubt that § 702 waives the Government’s immunity
from actions seeking relief other than money damages.” Id. at 186 (citation and quotation marks
omitted). The court then rejected the FTC’s argument that § 702’s waiver was limited to actions
arising under the APA challenging “final agency action.” In the words of Judge Garland:
We have previously, and repeatedly, rejected the FTC’s first
argument, expressly holding that the APA’s waiver of sovereign
immunity applies to any suit whether under the APA or not. . . .
Although we have never directly considered the contention that the
“final agency action” requirement of § 704 restricts § 702’s waiver
of sovereign immunity, our holding that the waiver is not limited to
APA cases — and hence that it applies regardless of whether the
elements of an APA cause of action are satisfied — removes the
linchpin of the FTC’s argument. Moreover, the language of the
waiver sentence again provides no support for the FTC’s
contention. While the sentence does refer to a claim against an
“agency” and hence waives immunity only when the defendant
falls within that category, it does not use either the term “final
agency action” or the term “agency action.” Nor does the
legislative history refer to either limitation. To the contrary, the
House and Senate Reports’ repeated declarations that Congress
intended to waive immunity for “any,” H.R. REP. NO. 94-1656, at
3, and “all,” id. at 9; S. REP. NO. 94-996, at 8, 1976 U.S. Code
Cong. & Ad. News, at 6129, actions for equitable relief against an
agency make clear that no such limitations were intended.
Id. at 186-87 (citations omitted).
The Commission makes the exact argument rejected in Trudeau: that sovereign
immunity bars Mr. Gupta’s claims because the OIP does not constitute “final agency action”
under § 704. (Br. at 9). Mr. Gupta, in seeking relief under § 2201, did not allege that the OIP is
a final order. Section 704 is inapposite, and § 702 controls. The Commission’s reliance on Fed.
Trade Comm’n v. Standard Oil Co. of Cal., 449 U.S. 232, 101 S.Ct. 488 (1980) (“SoCal”) (Br. at
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2, 9, 10, 16, 23, 24) for the point that an order instituting proceedings is not final agency action is
therefore misplaced. Additionally, unlike SoCal’s complaint, which sought “[j]udicial review of
the averments in the [Federal Trade] Commission’s complaints” before the conclusion of the
administrative proceedings, see SoCal, 449 U.S. at 243, Mr. Gupta’s Complaint does not seek to
challenge the merits of the OIP in this Court; it challenges the Commission’s unfair and
discriminatory treatment in issuing the OIP.
The Commission next asserts that, pursuant to § 703 of the APA, Mr. Gupta must
seek judicial review of the Commission’s actions only in a court of appeals through “the special
statutory review proceeding” provided by Section 25(a) of the Exchange Act, 15 U.S.C.
§ 78y(a). (Br. at 11). Section 703 states that the “form of proceeding for judicial review is the
special statutory review proceeding relevant to the subject matter in a court specified by statute
or, in the absence or inadequacy thereof, any applicable form of legal action, including actions
for declaratory judgments . . . in a court of competent jurisdiction.” The Commission lost this
precise point before the Supreme Court in Free Enterprise, when it argued that Section 25(a)
provides the “exclusive mechanism” for parties aggrieved by actions of the Commission to seek
review in the federal courts. See Br. of the United States On Writ of Certiorari to the U.S. Court
of Appeals for the D.C. Circuit, No. 08-861, 2009 WL 3290435, at *15., Doc. No. 24 (Oct. 13,
2009).
Free Enterprise involved an action for declaratory and injunctive relief
challenging on separation of powers grounds the constitutionality of the Public Company
Accounting Oversight Board (“PCAOB”) created by Sarbanes-Oxley. Under Sarbanes-Oxley,
the Commission was empowered to review any PCAOB rule or sanction, and aggrieved parties
were allowed to challenge “a final order of the Commission” or “a rule of the Commission” in a

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court of appeals under Section 25(a). 130 S.Ct. at 3150. The Commission contended there (as it
does again here) that Section 25(a) provided the exclusive route to judicial review for plaintiffs.
Id. Scrutinizing the language of Section 25(a), the Court squarely rejected the Commission’s
contention:
The Government reads § 78y as an exclusive route to review. But
the text does not expressly limit the jurisdiction that other statutes
confer on district courts. See, e.g., 28 U.S.C. §§ 1331, 2201. Nor
does it do so implicitly.
Id. (emphasis added). The Court’s reading of Section 25(a) was not confined to the facts of
Free Enterprise; the Court gave plain meaning to statutory words.
The Court added that “[p]rovisions for agency review do not restrict judicial
review unless the ‘statutory scheme’ displays a ‘fairly discernible’ intent to limit jurisdiction, and
the claims at issue ‘are of the type Congress intended to be reviewed within th[e] statutory
structure.’” Id. (quoting Thunder Basin Coal Co. v. Reich, 510 U.S. 200, 207, 212 (1994)):
Generally, when Congress creates procedures “designed to permit
agency expertise to be brought to bear on particular problems,”
those procedures “are to be exclusive.” Whitney Nat. Bank in
Jefferson Parish v. Bank of New Orleans & Trust Co., 379 U.S.
411, 420, 85 S.Ct. 551, 13 L.Ed.2d 386 (1965). But we presume
that Congress does not intend to limit jurisdiction if “a finding of
preclusion could foreclose all meaningful judicial review”; if the
suit is “wholly collateral to a statute’s review provisions”; and if
the claims are “outside the agency’s expertise.” Thunder Basin,
supra, at 212-213, 114 S.Ct. 771 (internal quotation marks
omitted). These considerations point against any limitation on
review here. We do not see how petitioners could meaningfully
pursue their constitutional claims under the Government’s theory.
Free Enterprise, 130 S.Ct. at 3150 (emphasis added).
The Court finally rejected the Commission’s argument that plaintiffs were
required first to incur a PCAOB sanction before commencing their action in federal court — and
then only in a court of appeals: “We normally do not require plaintiffs to ‘bet the farm . . . by

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taking the violative action’ before ‘testing the validity of the law,’ . . . and we do not consider
this a ‘meaningful’ avenue of relief.” Id. at 3151 (citing Thunder Basin, 510 U.S. at 212). The
Court found that plaintiffs’ constitutional claims were “outside the Commission’s competence
and expertise” and that “the statutory questions involved do not require ‘technical considerations
of [agency]’ policy. . . . They are instead standard questions of administrative law, which the
courts are at no disadvantage in answering.” Id.
For all of these same reasons, § 704 of the APA and Section 25(a) of the
Exchange Act do not strip this Court of subject matter jurisdiction over Mr. Gupta’s claims.
1.

Mr. Gupta Could Not Obtain Meaningful Review
In a Court of Appeals

If this Court lacked jurisdiction to hear Mr. Gupta’s equal protection claim, he
would be deprived of all meaningful judicial review. An administrative proceeding would
provide no means of asserting the equal protection claim alleged in this action. For one thing,
the SEC’s Rules of Practice do not permit counterclaims against the Commission. See In the
Matter of Jeffrey L. Feldman, Admin. Proc. File No. 3-8063, 1994 SEC LEXIS 186, at *4-5 (Jan.
14, 1994). Those rules also severely limit discovery by a respondent, especially by denying
discovery depositions. The Commission does not represent to this Court that Mr. Gupta could
conduct discovery in an administrative proceeding on the discriminatory purpose and effect of
the Commission’s OIP by use of document requests and discovery depositions (which its rules
do not permit). As a result, any appellate review of the agency’s ultimate determination would
be severely truncated and largely meaningless. Beyond that, if the Court declined to adjudicate
this action, Mr. Gupta would be forced to endure the very administrative proceeding he alleges to
be unconstitutional. Appellate review of any final order would thus be too little and too late: It

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is the very administrative proceeding itself that deprives Mr. Gupta of his constitutional rights —
and appellate review once the damage is done would be cold comfort.
2.

Adjudication of Mr. Gupta’s Claims Would Be
Outside of the Commission’s Expertise

The Commission argues that it is better placed than this Court to adjudicate “the
issues [Mr. Gupta] raises” (Br. at 17), but it can only sustain this position by mischaracterizing
the relief Mr. Gupta seeks. Contrary to the assertions in the motion, the Complaint does not ask
this Court to “[d]etermin[e] whether a person has violated the securities law and what sanction
should result” (id.); rather, it challenges the Commission’s decision to single out Mr. Gupta for
retroactive application of Dodd-Frank and thereby deny him the procedural protections enjoyed
by every other Galleon-related defendant.
The Commission cannot contend that adjudication of Mr. Gupta’s equal
protection claim against the Commission itself is peculiarly within the Commission’s
competence or expertise. And how could it be? The Administrative Law Judge would be asked
to make findings about the actions and motivations of the Commissioners, hardly a subject of
agency expertise. Simply put, concerns regarding “administrative expertise are not implicated
where a constitutional violation is alleged, because such allegations are particularly suited to the
expertise of the judiciary.” Adkins v. Rumsfeld, 389 F. Supp. 2d 579, 588 (D. Del. 2005).
Free Enterprise distinguished the type of constitutional claim that is at issue here
from the petitioner’s claims in Thunder Basin, which were primarily statutory:
“[A]t root . . . [they] ar[o]se under the Mine Act and f[e]ll squarely
within the [agency’s] expertise,” given that the agency had
“extensive experience” on the issue and had “recently addressed
the precise . . . claims presented.” [Thunder Basin], 501 U.S. at
214). Likewise, in United States v. Ruzicka, 329 U.S. 287, 67
S.Ct. 207, 91 L.Ed. 290 (1946), . . . we reserved for the agency
fact-bound inquiries that, even if “formulated in constitutional
terms,” rested ultimately on “factors that call for [an]
- 12 KL3 2824885.1

understanding of the milk industry,” to which the Court made no
pretensions. Id. at 294, 67 S.Ct. 207.
Free Enterprise, 130 S.Ct. at 3151. In contrast to those cases, the Court in Free Enterprise
found (as noted above) that “[n]o similar expertise is required here, and the statutory questions
involved do not require ‘technical considerations of [agency] policy.’ . . . They are instead
standard questions of administrative law, which the courts are at no disadvantage in answering.”
Id. at 3151.5
Mr. Gupta’s challenge to the Commission’s authority to proceed administratively
for civil penalties and its discriminatory treatment in doing so are the type of issues regularly
determined by federal courts. And the Commission — in resisting this point — appears to have
forgotten that it brought all of the other Galleon-related cases in this Court, a clear indication
that, at least for those defendants, the Commission has no apparent qualms about this Court’s
competence to adjudicate insider trading cases.

5

The Commission cites Thunder Basin for the proposition that Mr. Gupta’s claims,
including his constitutional claim, can be meaningfully addressed in a court of appeals. (Br. at
14). But Thunder Basin did not involve an equal protection claim against the very agency
charged with overseeing the administrative proceeding that the court of appeals would eventually
review. Rather, the plaintiff in that case brought a pre-enforcement challenge to regulations
promulgated under the Federal Mine Safety and Health Amendments Act of 1977, 30 U.S.C.
§ 801 et seq., alleging that compliance with those regulations would violate the Due Process
Clause of the Fifth Amendment. Id. at 205. Although the Department of Labor is charged with
enforcing those regulations, under the statute challenges to enforcement are reviewed by the
Federal Mine Safety and Health Review Commission, which the Court noted is independent of
the Department. Id. at 204. Thus, while the Court acknowledged that “[a]djudication of the
constitutionality of congressional enactments has generally been thought beyond the jurisdiction
of administrative agencies, . . . [t]his rule is not mandatory . . . and is perhaps of less
consequence where, as here, the reviewing body is not the agency itself but an independent
commission established exclusively to adjudicate Mine Act disputes.” Id. at 215 (citations and
internal quotation marks omitted).

- 13 KL3 2824885.1

3.

Mr. Gupta’s Claims Are Collateral to Section 25(a).

Touche Ross & Co. v. S.E.C., 609 F.2d 570 (2d Cir. 1979) — although decided
over thirty years before Free Enterprise — illustrates how Mr. Gupta’s claims are collateral to
Section 25(a). There, the Commission instituted an administrative proceeding pursuant to SEC
Rule 2(e) against the Touche Ross accounting firm and three of its former partners to determine
whether the respondents had engaged in improper auditing conduct and should be disqualified on
that basis from appearing before the Commission. Prior to the administrative hearing, Touche
Ross brought an action in this Court for declaratory and injunctive relief, alleging that Rule 2(e)
and the proceeding initiated under it were without statutory authority. The Second Circuit held
that Touche Ross was not required to submit to the administrative proceeding before challenging
the Commission’s rule-making authority in federal court, because “to require [Touche Ross] to
exhaust their administrative remedies would be to require them to submit to the very procedures
which they are attacking.” 609 F.2d at 577.
Against Free Enterprise, the Commission primarily relies on Altman. In Altman,
an attorney sued the Commission and its Chairwoman and Secretary in this Court seeking (1) a
stay of the Commission’s administrative proceedings against him and (2) an order vacating the
Commission’s decision imposing a lifetime ban from the attorney’s practice before the SEC.
The Commission had imposed that sanction after an Administrative Law Judge found at the
conclusion of a hearing that the attorney had knowingly offered to have his client provide false
testimony to the Commission during an investigation; thus, the administrative proceeding had
been completed before the suit in federal court.
The issue before Judge Holwell was simply whether the attorney should have
brought his challenge before a court of appeals, rather than a district court. The Court ruled that
the attorney’s claims that the Commission’s sanction wrongfully usurped powers properly held
- 14 KL3 2824885.1

by the New York State court system could be “meaningfully addressed in the Court of Appeals
should the attorney appeal the SEC’s sanction against him.” Id. at *5. In that key respect,
Altman found Touche Ross distinguishable:
The court [in Touche Ross] reasoned that administrative review of
the question in the first instance would be inappropriate because of
the plaintiff’s hardship in submitting to the disciplinary provisions
it was challenging, and because the SEC had no need to develop its
own factual or legal record in the dispute. Id. at 576-77. . . . Here
any harm to Altman due to the requirement that he raise his
constitutional challenges before the SEC seems minimal as he has
already litigated at least two hearings on the issue-one before an
administrative law judge and one before the SEC itself.
2011 WL 781918, at *6 (emphasis added).
The Commission itself recognized this distinction when it briefed the Altman
case, stating: “Touche Ross is further distinguishable because the Court’s concern was subjecting
the plaintiffs to the procedures they were attacking. Altman, however, did not bring his
challenge until the completion of the Commission’s proceeding. . . .” See Mem. of Law in
Opposition to Motion to Stay and Vacate, 1:10-cv-09141-RJH (Doc. No. 2 at 7) dated Dec. 9,
2010.6

6

The Commission (Br. at 16) attempts to equate Mr. Gupta’s allegations to a claim of
agency bias that was also asserted by the plaintiffs in Touche Ross and as to which the Second
Circuit held exhaustion was required. 609 F.2d at 574. Mr. Gupta’s claims, however, mirror the
claim in Touche Ross where immediate judicial review was allowed: a challenge to the
Commission’s authority to initiate an administrative proceeding. The Commission also relies on
Merritt v. Shuttle, Inc., 245 F.3d 182 (2d Cir. 2001) (Br. at 14, 15, 17), but that case actually
undercuts the Commission’s arguments. The Second Circuit stated that a statute vesting judicial
review exclusively in the courts of appeals precludes a district court from hearing claims that are
“inescapably intertwined with” review of the type of agency order entrusted to the courts of
appeal. 245 F. 3d at 187. As already shown, Mr. Gupta’s Complaint does not arise from a final
order of the Commission, and Free Enterprise held that Section 25(a) “does not expressly limit
the jurisdiction that other statutes confer on district courts,” 130 S. Ct. at 3150 — words that the
Commission did not call to the Court’s attention in Altman.

- 15 KL3 2824885.1

Like the plaintiffs in Free Enterprise and Touche Ross, Mr. Gupta’s claims are
wholly collateral to the Commission’s charges against Mr. Gupta under the securities laws.
Those cases are on point; Altman is not.
II.

THE EXHAUSTION AND RIPENESS DOCTRINES ARE
INAPPLICABLE TO THIS CASE
The doctrine of exhaustion does not divest a court of subject matter jurisdiction.

Bastek v. Fed. Crop Ins. Corp., 145 F.3d 90, 94 (2d Cir. 1998) (in the absence of statutory
provision requiring exhaustion, courts have “discretion to employ a broad array of exceptions
that allow a plaintiff to bring his case in district court”). Rather, courts consider whether
application of the exhaustion doctrine to a particular case would serve the prudential concerns
upon which the doctrine is premised:
The exhaustion doctrine was designed primarily to prevent
premature interruption of the administrative process. In that regard
it serves three main purposes. First, it preserves the autonomy of
the administrative agency by allowing the agency to apply its
expertise and exercise its discretion in appropriate circumstances,
by giving the agency a chance to discover and correct its own
errors, and by discouraging “frequent and deliberate flouting of
administrative processes [which] could weaken the effectiveness of
an agency.” Second, application of the exhaustion doctrine aids
judicial review which “may [otherwise] be hindered by the failure
of the litigant to allow the agency to make a factual record, or to
exercise its discretion or apply its expertise.” Third, requiring
exhaustion in appropriate cases promotes judicial and
administrative efficiency by prohibiting repeated interruptions of
the agency proceeding and by increasing the possibility that no
judicial decision will be necessary, since the complaining party’s
rights may ultimately be vindicated at the agency level.
Athlone Ind., Inc. v. Consumer Product Safety Comm’n, 707 F.2d 1485, 1488 (D.C. Cir. 1983).
These goals would not be served by dismissing Mr. Gupta’s claim against the Commission. See
Touche Ross, 609 F.2d at 577 (where there is “no need for the development of a factual record,
no room for the exercise of agency discretion, and little need for agency expertise in deciding the

- 16 KL3 2824885.1

question . . . ‘[t]o require exhaustion . . . would be overly harsh and wasteful.’”) (citation
omitted).
In Athlone, the D.C. Circuit reversed a district court’s dismissal of a suit to enjoin
the Consumer Product Safety Commission (“CPSC”) from continuing an administrative
proceeding for civil penalties against a manufacturer and distributor. The manufacturer and
distributor argued that civil penalties were unavailable under the Consumer Product Safety Act.
Id. at 1487. The D.C. Circuit noted that the CPSC’s statutory authority was “strictly a legal
issue” and “[n]o factual development or application of agency expertise [would] aid the court’s
decision.” Id. at 1489. “Nor [would] a decision by the court invade the field of agency expertise
or discretion. ‘[W]here the only . . . dispute relates to the meaning of the statutory term . . . [the
controversy] presents issues on which courts, and not [administrators] are relatively more
expert.’” Id. (citation omitted). Additionally, the court found that any attempt by plaintiffs to
challenge the CPSC’s actions administratively would likely be futile:
The Commission filed the complaint in the first place, presumably
on the basis of its conclusion that it had jurisdiction to assess civil
penalties administratively. It has defended that position before this
and other courts. And, after oral argument in this case, the
Commission unanimously ruled that it had the authority to assess
civil penalties in an administrative proceeding. When resort to the
agency would in all likelihood be futile, the cause of overall
efficiency will not be served by postponing judicial review, and the
exhaustion requirement need not be applied.
707 F.2d at 1489; see also Touche Ross, 609 F.2d at 577 (“exhaustion would be futile when the
‘very administrative procedure under attack in the one which the agency says must be
exhausted.’”) (citation omitted).
Here, the question of the Commission’s statutory authority to seek civil penalties
against Mr. Gupta in an administrative proceeding is strictly a legal issue. Importantly, the
constitutional claim Mr. Gupta has asserted would not be subject to any factual development in
- 17 KL3 2824885.1

the administrative proceeding and could be litigated effectively only in this action. Nor would a
decision by the Court invade the field of Commission expertise or discretion.

Statutory

interpretation and adjudication of constitutional claims is the work of federal district courts.
Ripeness serves the same general purposes as exhaustion, see Wright & Miller,
13B Fed. Prac. & Proc. Juris. § 3521.1 (3d ed.); Aquavella v. Richardson, 437 F.2d 397, 403-04
(2d Cir. 1971), and those purposes would not be served by delayed judicial review of the
Commission’s actions. The ripeness doctrine cautions courts not to render decisions absent a
genuine need to resolve a real dispute. See City of New York v. U.S. Dep’t of Commerce, 739 F.
Supp. 761, 765 (E.D.N.Y. 1990). “Determining whether administrative action is ripe for judicial
review requires [a court] to evaluate (1) the fitness of the issues for judicial decision and (2) the
hardship to the parties of withholding court consideration.” Sharkey, 541 F.3d at 89 (quoting
Nat’l Park Hospitality Ass’n v. Dep’t of Interior, 538 U.S. 803, 808 (2003)). The question
whether an agency has authority to undertake an ongoing proceeding is ripe if the question can
be answered without factual development in agency proceedings. See Atlantic Richfield Co. v.
U.S. Dep’t of Energy, 769 F.2d 771, 782-84 (D.C. Cir. 1984).
Under these principles, Mr. Gupta’s claims are clearly ripe for review by the
Court. Mr. Gupta pleads a colorable equal protection claim along with a pure question of
statutory interpretation. The Commission made these claims ripe by its “first use . . . of its new
authority under Dodd-Frank” against only one Galleon-related defendant. The Commission
inexplicably claims that it “has not determined that Section 929P of Dodd-Frank can be applied
retroactively” (Br. at 20); but the charges set forth in the OIP reflect otherwise, as do the Director
of Enforcement’s recent remarks. The Commission no doubt would have charged Mr. Gupta in
this Court with the other Galleon-related defendants had it not concluded that it could apply

- 18 KL3 2824885.1

Dodd-Frank retroactively. Suing in a federal district court had been and — but for this case
remains — the Commission’s consistent practice in litigated insider trading cases seeking civil
penalties against a non-regulated person. (Compl. ¶ 12).
Mr. Gupta is not asking the Court to make any broad pronouncements that might
disrupt the traditional path to judicial review of Commission action. The Complaint describes a
unique set of facts: Mr. Gupta is indisputably the first non-regulated person against whom the
Commission seeks to apply Dodd-Frank retroactively, and he is the only Galleon-related
defendant (in a class of over two dozen defendants) to be singled out to be tried administratively
and not in federal court. He commenced this action promptly after issuance of the OIP, and
before any agency action other than the OIP. The claims he raises are not embraced within the
language of Section 25(a) of the Exchange Act, and the facts of the case do not trigger
application of either the exhaustion or ripeness doctrine. Just as he has been singled out by the
Commission, he presents a singular set of facts, for which relief should be granted.

- 19 KL3 2824885.1

Conclusion
For the foregoing reasons, the Commission’s motion to dismiss should be denied
in all respects.
Dated: New York, New York
April 11, 2011

Respectfully submitted,

KRAMER LEVIN NAFTALIS & FRANKEL LLP

Of Counsel:
Lawrence S. Robbins
ROBBINS, RUSSELL, ENGLERT,
ORSECK, UNTEREINER &
SAUBER LLP
1801 K Street, NW
Suite 411L
Washington, DC 20006
[phone] (phone)
[phone] (fax)
[e-mail]

By:

/s/ Gary P. Naftalis
Gary P. Naftalis
Michael S. Oberman
Alan R. Friedman
David S. Frankel
Robin M. Wilcox
Michael J. Sternhell
1177 Avenue of the Americas
New York, New York 10036
[phone] (phone)
[phone] (fax)
[e-mail]
[e-mail]
[e-mail]
[e-mail]
[e-mail]
[e-mail]
Attorneys for Plaintiff Rajat K. Gupta

- 20 KL3 2824885.1

Statutory Appendix
5 U.S.C. § 702
§ 702. Right of review
A person suffering legal wrong because of agency action, or adversely affected or aggrieved by
agency action within the meaning of a relevant statute, is entitled to judicial review thereof. An
action in a court of the United States seeking relief other than money damages and stating a
claim that an agency or an officer or employee thereof acted or failed to act in an official
capacity or under color of legal authority shall not be dismissed nor relief therein be denied on
the ground that it is against the United States or that the United States is an indispensable party.
The United States may be named as a defendant in any such action, and a judgment or decree
may be entered against the United States: Provided, That any mandatory or injunctive decree
shall specify the Federal officer or officers (by name or by title), and their successors in office,
personally responsible for compliance. Nothing herein (1) affects other limitations on judicial
review or the power or duty of the court to dismiss any action or deny relief on any other
appropriate legal or equitable ground; or (2) confers authority to grant relief if any other statute
that grants consent to suit expressly or impliedly forbids the relief which is sought.
5 U.S.C. § 703
§ 703. Form and venue of proceeding
The form of proceeding for judicial review is the special statutory review proceeding relevant to
the subject matter in a court specified by statute or, in the absence or inadequacy thereof, any
applicable form of legal action, including actions for declaratory judgments or writs of
prohibitory or mandatory injunction or habeas corpus, in a court of competent jurisdiction. If no
special statutory review proceeding is applicable, the action for judicial review may be brought
against the United States, the agency by its official title, or the appropriate officer. Except to the
extent that prior, adequate, and exclusive opportunity for judicial review is provided by law,
agency action is subject to judicial review in civil or criminal proceedings for judicial
enforcement.
5 U.S.C. § 704
§ 704. Actions reviewable
Agency action made reviewable by statute and final agency action for which there is no other
adequate remedy in a court are subject to judicial review. A preliminary, procedural, or
intermediate agency action or ruling not directly reviewable is subject to review on the review of
the final agency action. Except as otherwise expressly required by statute, agency action
otherwise final is final for the purposes of this section whether or not there has been presented or
determined an application for a declaratory order, for any form of reconsideration, or, unless the
agency otherwise requires by rule and provides that the action meanwhile is inoperative, for an
appeal to superior agency authority.

KL3 2824885.1

15 U.S.C. § 78y
§ 78y. Court review of orders and rules
(a) Final Commission orders; persons aggrieved; petition; record; findings; affirmance,
modification, enforcement, or setting aside of orders; remand to adduce additional evidence
(1) A person aggrieved by a final order of the Commission entered pursuant to this chapter may
obtain review of the order in the United States Court of Appeals for the circuit in which he
resides or has his principal place of business, or for the District of Columbia Circuit, by filing in
such court, within sixty days after the entry of the order, a written petition requesting that the
order be modified or set aside in whole or in part.

A-2
KL3 2824885.1