On October 16, 2009, federal prosecutors charged Raj Rajaratnam, the founder of hedge fund Galleon Group, in an alleged insider trading scheme that, to date, has swept up 20 defendants and resulted in six guilty pleas. According to the Department of Justice (“DOJ”), the case is the first of its kind, for unlike prior insider trading prosecutions, DOJ relied on court authorized wiretaps of telephone conversations to build the case. The electronic surveillance allowed the Government to intercept conversations between Rajaratnam and alleged insiders concerning trading in the stock of public companies.

While wiretaps have been used successfully by DOJ against organized crime syndicates and drug traffickers, DOJ’s success in obtaining wiretaps in the Galleon case may embolden it to seek court authorization for electronic surveillance in future insider trading investigations. Audio recordings of the defendants’ discussions of material non-public information may constitute critical evidence concerning the defendants’ state of mind -- that is, that those who traded on such information did so knowing it was material, non-public information gained in violation of a fiduciary duty to its source.

Moreover, the Galleon recordings provide a window into the sophisticated methods that white-collar defendants are now employing to thwart criminal prosecutions. The defendants were reportedly recorded discussing ways to mask the source of the inside information, including creating fictitious e-mail trails showing “innocent” sources, and using prepaid mobile phones that were subsequently discarded. These types of techniques may actually provide ammunition to the government for future wiretap applications, for they support the necessary showing under federal law that other investigative procedures are unlikely to succeed.