White Collar: Are White Collar Wiretaps Too Easy

Last week I gave a presentation at the University of Miami Law School during a symposium conducted by the school's law review. The topic of the symposium was corporate crime. My panel discussed the Criminalization of Corporate Conduct.

I looked in particularly at the likely increased use of wiretap orders in the investigation of white collar crime. I used as a discussion point the wiretaps in the Galleon hedge fund cases, particularly focusing on the pleadings by the government and Defendant Raj Rajaratnam involving the motion to suppress the wiretap evidence.

Of particular interest is the issue of the necessity of the wiretaps. Rajaratnam argued that the taps were unnecessary for the government to accomplish its investigation. Moreover, the Defendant argued that the affidavit presented to the authorizing court was knowingly lacking in material details. The motion argued that the government failed to advise the court of the following: 1) the FBI had been conducting an investigation of Rajaratnam for over a year, 2) the SEC had been conducting an investigation for over four years, 3) as part of the its investigation, the SEC had obtained over 4 million documents, which it had reviewed, 4) the SEC shared the documents and important information from its investigation with the FBI, 5) the SEC had interviewed or taken investigative testimony from 20 Galleon employees, 6) the SEC had interviewed Rajaratnam twice, and 7) the government failed to advice the court that the SEC investigation was continuing while the wiretaps were underway.

The government argued that traditional investigative techniques would not work in the investigation. An undercover could not be introduced because of the insular nature of Galleon. Physical surveillance was not possible. And finally, interviewing witnesses or the execution of a search warrant would disclose the existence of the confidential investigation.

The court ruled that the government had failed to prove necessity due to its failure to make material disclosures to the authorizing court. However, the court did not suppress the evidence. Instead, it took into account the information adduced during a hearing on the motion. The court determine that the additional evidence supplemented that already in the affidavit. The court said that the SEC's investigation would not have proved the full extent of the criminal activity because the crime was largely conducted by telephone. Thus, the court denied the motion to suppress.

Title III, which provides for the authorization of wiretaps seems to make necessity condition precedent for the authorization of this extraordinary investigative technique. However, the court seemed to give the government two chances to establish probable cause. First, the government produced an insufficient affidavit. The the government had the opportunity to cure the deficiencies during the hearing.

If the government is allowed the opportunity to cure its intentional or reckless omissions, the protections against wanton use of wiretaps may be eviscerated.

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.