White Collar and Securities: New York Federal Court Okays Wiretap Evidence in Insider Trading Prosecutions

In a series of insider trading prosecutions in federal court in New York judges have ruled that wiretap evidence is admissible. The cases have arisen from a three year investigation of the Galleon hedge fund. The best known of the prosecutions is the case against Raj Rajaratnam, founder of Galleon. he is scheduled to go on trial on February 28, 2011, in the Southern District of New York.

In Rajaratnam's case, as well as the companion cases, the Justice Department has sought to introduce evidence of conversations intercepted pursuant to court authorized wiretaps. These cases appear to be the first time that wiretap evidence will be used by the government in an insider trading prosecution.

Wiretaps are authorized by the Omnibus Crime Control Act of 1968. They are an extraordinary investigative tool and are to be used only when the government demonstrates to the court that such wiretaps are necessary to further its investigation. Wiretaps are authorized when other less intrusive investigative techniques have proved insufficient. Courts refer to this as the "necessity" requirement. Affidavits in support of wiretap warrants must contain sufficient information to satisfy the court that other investigative means will not prove effective and that the wiretap requested is necessary to conduct the investigation. In many ways the law views a wiretap as essentially an investigative technique of last resort.

Historically, government has limited its use of wiretaps to investigations of crimes such as drug distribution and racketeering type offenses. Investigators have not used the technique in pursuit of white collar crime such as securities fraud. The probable explanation for this fact is that white collar type cases often have large numbers of documents that investigators can use to investigate economic relationships and the flow of monies. Moreover, business crime investigation typically affords the opportunity to interview witnesses who are not connected to the criminal scheme. Thus, document review, witness interviews, financial forensic analysis, and a grand jury may all be useful in concluding a successful investigation without the necessity of wiretaps. Additionally, wiretaps are most beneficial in the investigation of ongoing criminal activity. Most fraud investigations are retrospective. Thus, there is less likelihood of obtaining relevant evidence from a wiretap during a fraud investigation.

The fact that the government successfully persuaded courts to authorize the wiretaps and then admit the evidence from the taps in an insider trading prosecution suggests that in the future government investigators will seek to use wiretaps in fraud investigations where they believe that the criminal conduct is ongoing.

If you have any questions about this post, white collar enforcement, or securities litigation, please contact me at (954) 761-2902 or at richard.serafini@ruden.com.

White Collar: Government to Use Full Arsenal to Combat White Collar Crime

Traditional investigation of white collar offenses has involved reactive strategies focusing on document review and witness interviews. Increasingly the Department of Justice is using more proactive investigative strategies. For instance, the Galleon hedge fund insider trading prosecution is using extensive wire tap evidence. Additionally, the Department has recently brought a prosecution against 22 individuals for violations of the Foreign Corrupt Practices Act ("FCPA") based on the use of undercover agents. The FCPA outlaws the paying of bribes to foreign officials for business purposes.

Traditionally, white collar offenses came to the attention of law enforcement from complainants, whistle blowers, and self reporting. The new aggressive stance by the Justice Department could make prosecution of wrongdoing far more likely. Use of undercovers and electronic surveillance will facilitate the investigation and prosecution of these crimes.

In addition to the Galleon and FCPA prosecutions the Justice Department has seen significant success in its efforts to combat healthcare fraud. The Department has set up Medicare Strike Forces throughout the country. The first of these strike forces began operating in Miami and Los Angeles in 2007. The program has now expanded to include Detroit, Houston, Brooklyn, Tampa, and Baton Rouge. Since its inception the program has charged more than 300 defendants in more than 200 cases totaling allegations of more than $860 million in fraud. Prosecutors have convicted 230 defendants with almost 200 being sentenced to prison.

Assistant Attorney General Lanny Breuer has said that DOJ will continue its focus on white collar criminal prosecution. He told an audience at an American Bar Association event that the Department was developing "threat-based and intelligence-driven" strategies to pursue those committing mortgage fraud. Moreover, the AAG said that the Department was reorganizing sections to improve its approach in certain significant areas of prosecution.

For more about Assistant Attorney General Breuer's comments, please see Reuters, "US Top Cop Says Justice Department Using New Tools," February 25, 2010, http://www.reuters.com/article/idUSN2519413420100225.