The Justice Department continued its string of victories in insider trading cases after the United States Court of Appeals for the Second Circuit in Manhattan affirmed the insider trading convictions of Raj Rajaratnam.
The decision validates the government’s use of wiretaps as a means to investigate this type of crime. In turn, prosecutors will have a strong impetus to employ this tool in other white-collar crime investigations.
The use of wiretaps to obtain evidence against Mr. Rajaratnam and a host of others, including the former Goldman Sachs director Rajat Gupta, is a significant change in how prosecutors approached the insider-trading investigation. The Second Circuit gave the government a clean bill of health in how it obtained the authorization for the wiretaps, rejecting the claim that prosecutors acted improperly by misleading the court.
The federal Wiretap Act requires prosecuors to establish the “necessity†to listen to private conversations by showing, among other things, that less invasive investigative techniques have proved unsuccessful. A significant legal issue in the case was the finding by United States District Court Judge Richard J. Holwell that the affidavit submitted by the government was misleading because it failed to disclose an investigation of Mr. Rajaratnam by the Securities and Exchange Commission.
Judge Holwell, who has since left the bench and entered private practice, found that the government acted with “reckless disregard for the truth†by not disclosing “clearly critical†information about the scope of the S.E.C. investigation. The affidavit did not discuss the fact that Mr. Rajaratnam had been deposed by the S.E.C. and his firm, the Galleon Group, had turned over extensive records related to its trading.
Yet, Judge Holwell still rejected Mr. Rajaratnam’s argument that the recordings, which were critical to proving his! guilt, should be suppressed because the information was not material to the decision to authorize the wiretap. This finding was challenged, while the government argued that it had acted properly. The judge’s criticism was particularly stinging; a finding that prosecutors acted recklessly raised questions about whether the government overstepped entirely in pursuing the case.
The appeals court rejected Judge Holwell’s conclusion that prosecutors were reckless, essentially finding that the failure to disclose extensive information about the S.E.C.’s investigation was irrelevant to its application. The Justice Department’s investigation was separate, so it was not required to reference a civil inquiry in asking for a wiretap for its own case.
In explaining why the affidavit did not detail the S.E.C.’s investigation of Mr. Rajaratnam, the prosecutor said that she had not considered it relevant because it was a separate investigation and not something available to the criminal investigatrs to gather information. The appeals court found this explanation plausible, undermining any inference that the Justice Department tried to pull a fast one in asking for a wiretap.
Not disclosing the fact that S.E.C. had run into a brick wall in its civil inquiry would have strengthened the request for a wiretap. Therefore, it could hardly be viewed as reckless to not disclose information that would be helpful.
The appeals court noted that “it is difficult to imagine a situation where the government would intentionally or ‘with reckless disregard’ omit information that would strengthen its ‘probable cause’ or ‘necessity’ showing.â€
The ruling means that Mr. Gupta will not be able to argue that the wiretaps were improper during his appeal. Separately, Mr. Gupta has also argued that certain recordings should not have been admitted at his trial because he was not a party to the conversation. This ruling does not affect his ability to argue that point.
The Second! Circuit ! decision will prove to be important in future cases because it frees up prosecutors to seek a wiretap without requiring them to defer to an S.E.C. investigation. So now the Justice Department has the flexibility to choose to await the outcome of a civil investigation to see if it shows a crime, or opt to seek a powerful investigative tool like wiretaps if the agency believes it will help push forward the criminal investigation.
Wiretapped conversations are powerful evidence because they let a jury hear the defendant speak unfiltered. The Second Circuit’s decision gives a powerful imprimatur to how the government sought the wiretaps and their use in pursuing the insider trading cases tied to Mr. Rajaratnam.
When something works well, prosecutors have a tendency to copy it for other investigations. It would not be a surprise to see greater use of wiretaps in white-collar crime investigations in areas beyond just insider trading, with the Second Circuit’s decision serving as the touchstone fr what needs to be done to obtain the necessary judicial authorization.
