BUGGING THE BOARDROOM--WHITE COLLAR PROSECUTIONS AND WIRETAPPING
Rajaratnam Conviction Signals Government’s New Strategy for Old Tool
If Colorado federal prosecutors were building a case against former Qwest CEO Joe Nacchio today, it’s quite possible that their toolbox would include old fashioned bugging devices similar to those planted in mobster Paul Castellano’s kitchen table lamp back in the early 1980’s. Apparently everything old is new again, because federal prosecutors just landed a stunning conviction against billionaire hedge fund manager, Raj Rajaratnam, in one of the government’s biggest insider trading cases in U.S. History, using the modern-day equivalent of “Big Paul’s” kitchen table lamp.
Rajaratnam, the founder of Galleon Group, a New York hedge fund with assets of up to $7 billion, was convicted last month on fourteen counts of securities fraud and conspiracy. The federal government estimated Rajaratnam’s illegal profits and avoided losses from inside trades to be more than $63 million. The sheer scope of the case, which led to insider trading charges against 25 defendants, is enough to put Rajaratnam in league with such “Hall of Shamers” as Ivan Boesky and Michael Milken. But what really sets this case apart is the fact that it was the first insider trading prosecution to use wiretapped recordings to win the conviction. Over the course of the twelve-day trial, the government played 66 separate taped conversations for the jury, while Rajaratnam sat quietly in the courtroom listening to his own recorded accounts of receiving confidential inside tips from contacts at Wall Street’s most powerful institutions, including Goldman Sachs, IBM, Bear Sterns, and Intel. Jurors reported that the wiretaps of Mr. Rajaratnam were the deciding factor in rendering their decision.
Of course, wiretaps are familiar trappings for prosecutors and screenwriters alike when going after Mafiosi and drug kingpins. Tony Soprano made regular trips down to his basement to quietly discuss “business” with his crew, even though every word was being monitored by the FBI until Tony’s daughter, Meadow, took Tony’s table lamp (sound familiar?) to decorate her college dorm room. Wiretaps were the FBI’s secret weapon against the Soprano’s real-life counterparts such as Messrs. Castellano, Gambino, and Gotti. Indeed, the first U.S. Supreme Court wiretapping case, Olmstead v. United States (1928), involved the taped conversations of a prohibition-era bootlegger. But the Rajaratnam case was the first time wiretapped conversations were used in securities fraud prosecutions. Until now, most fraudulent trading cases have been fairly strategic in scope, built upon a small number of suspicious trades—think Martha Stewart. This is because broad-based wiretaps are very costly and time consuming propositions. The Federal Wiretap Act, generally referred to as “Title III,” requires a lengthy application process and a court order issued by a judge who must determine the presence of probable cause for the belief that a crime has been, or is about to be committed. While judges seldom deny government requests for wiretap orders, the real work begins afterwards. Wiretaps must be monitored in real time to “minimize the interception of communications” that are unrelated to the crime. Agents must literally stop and start the recordings based on the content of the contemporaneous conversations. Minimizing unrelated interceptions is more problematic in white collar cases because suspects are more likely to converse with co-workers, friends, and spouses as part of their daily activities, unlike organized crime figures who tend to segregate their illegal activity from their family routine. Moreover, judicial officers must regularly monitor progress and renew court approval based on periodic reports. For these reasons, electronic eavesdropping is costly and controversial.
Nonetheless, Colorado’s white collar practitioners should expect to see prosecutors using wiretaps on a more regular basis after their dramatic success in the Rajaratnam case. There is little doubt that the case was made using the stunning admissions captured through electronic surveillance. Key evidence included a taped conversation showing Rajaratnam received inside information about an expected quarterly loss at Goldman Sachs from Goldman board member, Rajat Gupta. The wiretap caught Rajaratnam telling his contact, “I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share. The Street has them making $2.50.” In another tape, Rajaratnam advised a fellow hedge fund manager to buy a million shares of a tech stock based on an inside tip, but then immediately sell half the shares to provide a plausible cover against federal regulators. These are only two examples of the 66 incriminating conversations played for the jury.
Rajaratnam will most certainly appeal. His lead counsel, John Dowd, even left the courthouse declaring, “See you in the Second Circuit.” Among the issues preserved for appeal are whether the government’s wiretap application failed to establish probable cause, whether wiretaps were even necessary in light of conventional investigative procedures, and whether the government adequately minimized the interception of communications. The appellate court also will be asked to address whether the government is even entitled to use wiretaps to investigate insider trading cases when Title III is silent on the issue. In his Order denying the suppression of the wiretap evidence, Judge Richard J. Howell found that since Title III authorizes the government use of wiretaps to investigate wire fraud, “the government was authorized to use wiretaps to investigate a fraudulent insider trading scheme using interstate wires even though Title III does not specifically authorize wiretaps to investigate insider trading alone.” Judge Howell did have concerns about the adequacy and completeness of the government’s wiretap application, but not enough concern to suppress the evidence. According to the trial court, the government’s application omitted and misstated important information regarding the credibility of a key government informant and the overall scope of the SEC’s investigation. “Given that the issuing court relies on the government candidly to disclose the full nature and scope if its investigation in order to determine whether a wiretap is necessary, the omissions here are troubling to say the least.” Nonetheless, Howell allowed the evidence to be heard because the other portions of the application demonstrated ample reason to find probable cause.
Until the appeal issues are resolved, it is unclear just how useful wiretaps will be as an investigative tool in building securities fraud cases. In the meantime, the government will be including Title III applications in its white collar arsenal, and Colorado practitioners would be well advised to consider the following compliance issues:
Judges will be listening. To be sure, the next wiretap application in a white collar case will be closely scrutinized, and any misstep in the process may result in the exclusion of key evidence against some overly ambitious Whartonite looking to be the next god of Greenwich, Connecticut.
 The Wire and Electronic Communications Interception and Interception of Oral Communications Act (formally known as the “Title III” Wiretap Act, 18 U.S.C. §§ 2510-2520).
 United States v. Rajaratnam, et al., No. 09 Cr. 1184 (RJH), 2010 WL 4867402, at *1 (S.D.N.Y. Nov. 24, 2010).