Business Crimes Bulletin ® Volume 17, Number 5 • January 2010
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Business Crimes Bulletin ® Volume 17, Number 5 • January 2010 New Use of Wiretaps In Insider Trading Cases By Stanley A. Twardy, Jr. and HOW T H E CASES UNFOLDED that it can convict solely upon the docu- Doreen Klein The complaints show how the cases un- mentary evidence without relying on the folded. The Rajaratnam complaint, for ex- cooperator’s testimony. As 2008 ended with the arrests of Marc ample, initially describes the government’s Moreover, the charge of insider trading Dreier and then Bernard Madoff nine days discussions with a cooperating witness — requires that the government establish the later, it seemed unlikely that 2009 would identified as Roomy Khan by those famil- defendant’s state of mind — that the defen- prove as significant. Then, on Oct. 16, 2009, iar with the case — who was a hedge fund dant traded while in “‘knowing possession federal agents arrested Raj Rajaratnam, the manager and former Galleon Group em- of material, non-public information that has founder of hedge fund Galleon Group, in ployee. Faced with criminal charges aris- been gained in violation of a fiduciary duty an alleged insider trading scheme that in- ing out of her own illicit trades, Khan be- to its source.’” SEC v. Dorozhko, 574 F.3d 42 volved well known public companies and came a cooperating witness in November (2d Cir. 2009) (citation omitted). Historically, thus far 20 defendants, including lawyers, 2007 and not only provided information the government has attempted to prove this stock traders, management consultants, concerning the tips she gave Rajaratnam, through circumstantial evidence. Because and executives inside the issuers them- but also recorded her telephone conversa- the government must prove that a defendant selves. Unlike the Dreier and Madoff cases, tions with him. knew both that the information was non- these arrests proved shocking not simply Subsequently, the government obtained public and that it was disclosed in breach of because highly placed members of the fi- court orders authorizing wiretaps — first of a fiduciary relationship, audio recordings of nancial, business and legal world were Rajaratnam’s cell phone, then of the phones defendants discussing non-public informa- seen in handcuffs, but also because of how of an unindicted co-conspirator — and inter- tion in real time will make such proof far they got there. cepted conversations between Rajaratnam easier for the government. The Department of Justice (“DOJ”) re- and alleged insiders concerning trading in The Galleon complaints describe at lied heavily on wiretapped telephone con- the stock of public companies. For exam- length the defendants’ paranoia concern- versations to build its case. According to ple, conversations between Rajaratnam and ing their activities, thereby evidencing, Preet Bharara, the U.S. Attorney for the co-defendant Anil Kumar — a director at a in the government’s view, their guilty Southern District of New York, the case management consulting firm retained by knowledge that they were breaking the against Rajaratnam and his co-defendants Advanced Micro Devices (“AMD”) — alleg- law. Co-defendant Danielle Chiesi, whose is the “first time that court-authorized edly involved non-public information about telephone was tapped during the inves- wiretaps have been used to target signifi- AMD’s forthcoming multibillion dollar re- tigation and who was arrested the same cant insider trading on Wall Street,” and organization. Rajaratnam is alleged to have day as Rajaratnam, is recorded in various all defendants charged “were ultimately purchased AMD shares for Galleon before conversations cautioning: “Don’t put any- caught committing their alleged crimes the reorganization was announced. thing on e-mail,” “Don’t e-mail even Raj or over phones that [law enforcement was] anybody,” “Be careful.” In a different con- listening to.” The technique proved fruit- TH E USE OF WIRETAPS versation, she reportedly said that she’s ful: in addition to the 20 arrests from across While wiretaps have long been a suc- going to “get a new cell phone” because the country, DOJ suggests that more are cessful law enforcement weapon against “I’m paranoid,” to which a co-defendant forthcoming. As of this writing, five hedge drug trafficking and organized crime, the allegedly responds, “Well don’t keep talk- fund managers and an attorney have Galleon case may portend their increased ing about it on the phone.” In another al- pled guilty. use in white-collar cases. Insider trading leged call, Chiesi tells Rajaratnam that she cases can be difficult to build and prove. is “glad that we talk on a secure line, I Stanley A. Twardy, Jr. (satwardy@daypit- They are typically historical accounts of appreciate that,” to which Rajaratnam re- ney.com), a former U.S. Attorney for Con- past trades built on inferences from pains- plies, “I never call you on my cell phone.” necticut and a member of this newsletter’s taking analysis of trading and telephone In an exchange reported widely in the Board of Editors, is a partner at Day Pit- records. Even those cases involving an in- press, Chiesi is quoted as saying: “You ney LLP in Stamford, CT. Doreen Klein is formant rely heavily upon such records. just gotta trust me on this … Here’s how Counsel at the firm and a former New York Since a cooperator’s motives are often sus- scared I am about what I’m gonna tell you County Assistant District Attorney. pect, the government likes to tell the jury on AMD … I swear to you in front of God, LJN’s Business Crimes Bulletin January 2010 you put me in jail if you talk.” Later, she is ammunition for the government to obtain Electronic surveillance in the white-collar quoted as saying: “I’m dead if this leaks. I wiretap warrants in the future. context also raises practical issues. Even as- really am — and my career is over. I’ll be suming that federal agents become as con- like Martha f---ing Stewart.” RAJARATNAM ’S DEFENSE versant in the jargon of the financial ser- Rajaratnam’s answer to the SEC’s paral- vices industry as they claim to be with the A ‘VERITABLE SMORGASBORD ’ lel civil complaint argues that the govern- lingo of drug deals, telephone talk by trad- The government is, predictably, heart- ment’s “unprecedented” use of the wiretaps ers is subject to misinterpretation and will ened by this evidence. At Rajaratnam’s violated both federal law and his consti- be hotly contested before the fact finder. bail hearing the prosecutor described the tutional rights. Providing a possible road- Finally, the transcripts of these conver- evidence as “overwhelming” and a “veri- map to a subsequent motion to suppress sations are discoverable in the parallel table smorgasbord” of insider trading tac- the recordings, Rajaratnam contends that civil proceedings against Rajaratnam now tics, with cooperating witnesses prepared the government cannot establish that other pending before Judge Jed S. Rakoff, who to provide “extensive” testimony and tele- investigative techniques would have been has shown little patience with the SEC. (He phone and trading records that corrobo- unsuccessful. He argues that, at the time recently rejected the SEC’s settlement with rated the evidence. The prosecutor repeat- DOJ sought authorization to conduct elec- Bank of America in connection with its edly referenced the recordings as evidence tronic surveillance, the SEC had already in- merger with Merrill Lynch.) Judge Rakoff of Rajaratnam’s intent to commit the crimes terviewed numerous witnesses under oath, has denied the SEC’s request to stay its civil charged. including Rajaratnam himself, under the action pending resolution of the criminal Paradoxically, the defendants’ evasive “guise” of an investigation into an unrelat- charges. The Galleon defendants will there- tactics may open the way for more wiretaps ed hedge fund; that Galleon had produced fore learn details of the government’s case in white-collar cases. To obtain a wiretap “tens of thousands of pages” of documents and may find further grounds to contest warrant, the government must provide a in the course of that investigation; and that the government’s wiretap evidence in the “full and complete statement as to whether the lead SEC staff attorney who participat- criminal trial. or not other investigative procedures have ed in that investigation was assigned to the One thing is certain. Prosecutors and been tried and failed or why they reason- criminal case and submitted applications in white-collar defense lawyers will be fol- ably appear to be unlikely to succeed if support of DOJ’s request for electronic sur- lowing the Galleon case closely to learn tried or to be too dangerous.” 18 U.S.C. § veillance. Faulting DOJ for failing to bring the ramifications of wiretaps in white-col- 2518. Such a showing has been difficult these facts to the court’s attention when it lar cases that will inevitably follow. with white-collar crime because it is not as submitted the wiretap application, Rajarat- inherently dangerous as street crime, and nam contends that the government’s rep- prosecutors have traditionally relied on resentations to the court were false when cooperating witnesses. Here, Rajaratnam it stated that interviews of Rajaratnam was allegedly recorded counseling his col- and others could not be done, were too leagues on how to avoid detection of insid- risky, and that a “failed interview” would er trading, advising them to create a ficti- compromise the insider trading investiga- tious e-mail trail showing innocent sources tion. of the information, and suggesting ways to make it harder for the government to de- CON C L U SION tect the illicit activity. A modus operandi of With court approval of the wiretaps insider trading that would justify wiretaps in the Galleon cases, the door has been may now be taking shape.