NEW YORK, April 14 (Reuters Breakingviews) - The Securities and Exchange Commission is bringing Guantanamo Bay-style justice to Wall Street -- but it's flawed. Accused fraudster Rajat Gupta is fighting the regulator for suing him in a stripped-down forum rather than federal district court. Judge Jed Rakoff, who may hear his challenge, is also concerned.
The Dodd-Frank financial reform law allows the SEC to put financial fraud cases on a fast track in administrative hearings rather than going to full federal court. The loose analogy is the trial of Gitmo detainees by military tribunals rather than U.S. courts -- it's still a defined legal process, but there are fewer safeguards to protect those accused.
Gupta may well fail in his claim that Dodd-Frank's expansion of the use of administrative courts should not apply to him retroactively. But the former McKinsey boss, who is alleged to have passed inside information on Goldman Sachs and other companies to Galleon Group's Raj Rajaratnam, has a point about his rights. In the short-cut process, he can't get a jury trial or demand many of the details behind the SEC's case against him.
More important, abbreviating a citizen's traditional rights opens the process to endless challenge. In this case, there's an additional question of arbitrariness. As Gupta points out in court papers, the SEC filed all its other Galleon-related cases in federal district court.
Rakoff, the federal judge slated to hear Gupta's challenge, has his own concerns. In remarks this week, he said having specialized courts like the SEC's administrative forum risks judges getting lost in "impenetrable jargon" and focusing on one area of law at the expense of others that may be relevant. That can lead to lightly reasoned decisions, he argued, and high reversal rates. Rakoff may be underestimating the benefit of having an expert on the bench, but his own experience of financial cases gives his advice weight.
At the very least, the SEC needs to be clear about when it will use its own courts rather than the broader federal system. And it may be that administrative courts shouldn't be the first choice. Federal district courts aren't immune to reversals, like those in insider trading cases of the late 1980s. But the administrative process looks especially vulnerable. Reforms allowing decisive action to clean up fraud sound sensible, but legal shortcuts could undermine them.
-- U.S. District Judge Jed Rakoff on April 11 criticized the Dodd-Frank financial reform law for allowing the Securities and Exchange Commission to sue more fraud suspects in the agency's administrative courts rather than federal district court. In a speech at New York's Fordham University School of Law, Rakoff suggested that giving administrative law judges greater authority over cases against defendants not regulated by the SEC might compromise the clarity and accuracy of financial-fraud decisions.
-- He said he was concerned that, unlike federal judges who hear a variety of cases, SEC judges might develop "tunnel vision" from hearing only financial cases and lose sight of the broader concerns of the law. His point came after a more general criticism of specialized courts, like federal bankruptcy and patent courts and state business courts.
-- Rakoff is scheduled to hear a challenge next week to an insider trading case that the SEC filed in administrative court against Rajat Gupta, formerly the worldwide director of McKinsey and a board member of Goldman Sachs and other blue-chip companies, who allegedly passed inside information to Raj Rajaratnam, the founder of Galleon Group. Gupta argues that his case should be heard in federal court, because Dodd-Frank was enacted after his allegedly illegal behavior occurred and because an administrative proceeding would deprive him of a jury trial and certain discovery rights.
(By Reynolds Holding, a Reuters Breakingviews columnist. The opinions expressed are his own)