On Monday, the Second Circuit Court of Appeals in Manhattan affirmed the 2011 insider trading conviction of Raj Rajaratnam, founder of the Galleon Group hedge funds. The case against Rajaratnam, who is serving a sentence of 132 months imprisonment, was constructed using, among other evidence, 45 secretly recorded phone calls from Rajaratnam’s cell phone during which he shared confidential information about publicly traded companies. The trial court found that the government had acted with “reckless disregard for the truth” in obtaining permission to wiretap Rajaratnam’s phone. A unanimous three-judge panel of the Court of Appeals disagreed. The decision is significant, especially because the investigation into Rajaratnam’s behavior, which also implicated the former director of Goldman Sachs Rajat K. Gupta, is the most prominent example of the use of wiretaps typically associated with organized crime and drugs cases in white collar prosecutions.
The Second Circuit’s opinion validates the government’s use of wiretaps in white collar cases and likely will help promote continued use of the technique. The decision may be seen as relieving federal prosecutors and agents from the obligation to reveal in a wiretap application the existence of parallel civil investigations and evidence obtained from such investigations in certain instances. Coupled with the recent revelations of secret National Security Agency surveillance of Americans, disclosed by Edward Snowden, this use of the wiretap statute may give privacy proponents renewed reason to be concerned that Big Brother is listening.
Pursuant to federal wiretap law, the government’s wiretap applications must prove that no reasonable alternative investigative techniques – such as surveillance, the use of informants, review of phone records, and witness interviews, to name a few – will suffice. This requirement, commonly referred to as the “necessity” prong, is intended to protect individual privacy interests by ensuring that the government does not resort to wiretapping when normal investigative techniques will do the trick. Rajaratnam sought to have the wiretap evidence against him suppressed at trial, arguing that the government failed to satisfy the necessity requirement when it obtained permission to record his conversations. Specifically, Rajaratnam argued that the government’s wiretap application improperly omitted the fact that he and his company had been the subject of an ongoing SEC investigation, that during the course of that investigation the SEC had obtained approximately four million documents and testimony from Rajaratnam through the use of traditional investigative techniques, and that the SEC had shared these materials with federal prosecutors.
The district court judge, Richard J. Holwell, found the government’s failure to include this information, which he referred to as “the most important part of the investigation,” in its wiretap application “glaring” and concluded that the government had acted with “reckless disregard for the truth.” Nevertheless, Judge Holwell allowed the evidence to be submitted to the jury because it was not “material” to a finding of necessity.
On appeal, the Second Circuit rejected Judge Holwell’s characterization of the government’s omissions. The Court explained that a “reckless disregard for the truth” cannot exist unless the omissions were “designed to mislead.” The federal prosecutor who applied for the wiretap against Rajaratnam testified that it “never occurred to her” to include the SEC investigation in discussing traditional investigative techniques because she exercised no control over the SEC or how it conducted its civil investigation. The FBI agent who submitted an affidavit in support of the wiretap application similarly testified that “[w]e just didn’t really think about it.” Based on this testimony, the Court concluded there was no suggestion that the omission was made with a “design to mislead” the court or with “reckless disregard for the truth.”
Further, the Second Circuit held that the omitted information would in fact have strengthened the government’s wiretap application, as the evidence gathered by the SEC “strongly suggested that Rajaratnam had been careful to exchange nearly all of his inside information by telephone.” Federal courts have recognized that wiretapping is particularly appropriate where a suspect routinely relies on the telephone to engage in criminal behavior. Finally, the Second Circuit concluded, like Judge Holwell, that the government’s omission was not material and that the information contained in the government’s wiretap application was sufficient to support a finding of necessity.
Clearly the Rajaratnam decision and the government’s pursuit of Snowden are unrelated. However, consideration of the Court’s decision in an atmosphere of significant concern about revelations of the extent of government surveillance may lead some to conclude that the government’s ability to intercept communications is too broad and that a Congressional response is required.
From The Insider Blog: White Collar Defense & Securities Enforcement.