Former Goldman Sachs director Rajat Gupta and his lawyer, Gary Naftalis of Kramer Levin Naftalis & Frankel, declared what might seem to be a very strange kind of victory last week when the Securities and Exchange Commission agreed to drop its administrative proceeding against Gupta. The two-page stipulation between Gupta and the SEC makes it clear that the SEC isn’t giving up on its claims that Gupta engaged in insider trading when he allegedly passed confidential information about Goldman Sachs and Procter & Gamble to Galleon Group hedge fund chief Raj Rajaratnam. All Gupta won was a pledge that the agency will sue him in federal court. And that is indeed a huge victory.

The SEC chose an anomalous vehicle for its March 1 suit accusing Gupta of helping Rajaratnam engage in insider trading. Instead of bringing a case against Gupta in Manhattan federal court — as the SEC did when it sued 28 other Galleon insider trading defendants — the agency filed what’s known as a public administrative proceeding. Those proceedings take place before an administrative law judge under SEC rules, not the federal rules of civil procedure. There’s no jury, and the first appeal of any adverse ruling goes to the SEC commissioners, not to an appeals court.

As Gupta counsel Naftalis laid out in his March 18 federal court complaint against the SEC, the differences between an SEC administrative proceeding and a federal court case added up to a big pile of prejudice against Gupta. Gupta wouldn’t be able to take depositions or conduct full discovery to counter the SEC’s assertions. The SEC, meanwhile, would be able to introduce hearsay evidence that it might not be able to get into evidence in federal court, according to the Gupta complaint. “The only plausible inference is that the Commission is proceeding how and where it is against Mr. Gupta for the bad faith purpose of shoring up a meritless case by disarming its adversary,” the complaint asserted.

The SEC’s attempt to sue Gupta in an administrative proceeding was all the more reprehensible, Gupta claimed, because the SEC has no regulatory power over him. He’s not an officer of a public company or a broker-dealer, or in any other position that falls under the purview of the SEC. Instead, the agency relied on provisions of the Dodd-Frank Wall Street Reform Act to bring the Gupta case as an administrative proceeding — even though all of Gupta’s alleged misconduct took place before Dodd-Frank was passed.

Gupta and Naftalis argued that the retroactive application of Dodd-Frank to hamstring Gupta’s defense amounted to an unconstitutional violation of his due process rights, since he alone, of all the Galleon defendants, had been sued in an administrative proceeding. In the federal court suit, which landed before Judge Jed Rakoff, Gupta and Naftalis asked for a declaration that the SEC can’t apply the Dodd-Frank civil penalty provisions retroactively and an injunction barring the SEC from bringing an administrative proceeding against Gupta.