SEC Can't Have Rajaratnam Wiretaps for Civil Case, Appeals Court Rules

A federal appeals court blocked a demand by the Securities and Exchange Commission for wiretaps from the insider-trading prosecution of Galleon Group co-founder Raj Rajaratnam for use in its related civil suit.

U.S. District Judge Jed Rakoff, who is presiding over the SEC’s civil enforcement case, was wrong to order Rajaratnam and his co-defendant, Danielle Chiesi, to turn over the wiretaps, a panel of the U.S. Court of Appeals for the Second Circuit in New York ruled today. The defense received the recordings from federal prosecutors in their criminal case.

The appeals court said Rakoff abused his discretion in ordering Rajaratnam and Chiesi to turn over the wiretaps before U.S. District Judge Richard J. Holwell, who is presiding over the criminal case, has had a chance to rule on their legality. The decision doesn’t bar the agency from obtaining the wiretaps later in the case after Holwell rules.

“The district court clearly exceeded its discretion in ordering disclosure of thousands of conversations involving hundreds of parties, prior to any ruling on the legality of the wiretaps and without limiting the disclosure to relevant conversations,” the panel said in its opinion.

Rajaratnam, 53, and Chiesi, 44, are accused of illegally using tips from company executives, hedge fund employees and other insiders. They were charged in October 2009 as part of the biggest insider-trading prosecution in history. The scheme reaped $52 million in illegal profits, according to the SEC.

Wiretaps

According to Rajaratnam and Chiesi, the government wiretapped conversations involving 18,150 communications involving 550 people on 10 phones over the course of 16 months.

Prosecutors said they lack the legal authority to provide the wiretaps directly to the SEC, according to the appeals court.

“The more prudent course” may have been to postpone the civil trial until after completion of the criminal trial, a proposal that was agreed to by all the parties in the case, the appeals court said.

The appeals court rejected an argument by Rajaratnam and Chiesi that federal law bars the disclosure of wiretaps in civil cases.

“We are pleased with the 2nd Circuit ruling today that the Commission has a legitimate right to obtain relevant, legally intercepted wiretap materials from defendants prior to their disclosure in criminal proceedings,” John Nester, an SEC spokesman, said in an e-mailed statement.

In August, Holwell granted Rajaratnam’s request for a hearing in the criminal case on his claims that prosecutors filed a misleading application to wiretap his conversations and that they should be excluded from the criminal trial.

An evidentiary hearing on the wiretaps in the criminal case is scheduled for Oct. 4 before Holwell in Manhattan.

The case is Securities and Exchange Commission v. Rajaratnam, 10-CV-462, U.S. Court of Appeals for the Second Circuit (Manhattan).

To contact the reporter on this story: Bob Van Voris in New York federal court at rvanvoris@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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