Rajaratnam Appeal Judges Voice Concern Over U.S. Wiretaps

Judges hearing the appeal of Galleon Group LLC co-founder Raj Rajaratnam, who is serving 11 years in prison for insider trading, voiced concern over whether prosecutors improperly won authority to wiretap his phone calls.

A three-judge panel in Manhattan heard arguments today over whether to reverse Rajaratnam’s conviction for insider trading. The central issue is if prosecutors misled the lower court judge who authorized the wiretaps in 2008 by omitting key facts from their request for the secret recordings, and if Rajaratnam’s conviction should be overturned as a result.

“What happens if we agree with you?” U.S. Circuit Judge Robert Sack asked Rajaratnam’s lawyer, Patricia Ann Millett, at the start of the argument. “Does this mean a new trial?” Millett responded yes.

A second judge, Jose Cabranes, suggested in his questions that prosecutors had acted properly. The third judge, Susan Carney, asked Millett what the “remedy” would be if the judges agreed that prosecutors had misled the district court.

The appeals court didn’t rule. A reversal would lead to a new trial for Rajaratnam where wiretaps wouldn’t be played, while a decision for the government will keep Rajaratnam behind bars. He is serving his time at the Federal Medical Center Devens in Ayers, Massachusetts.

45 Recordings

Rajaratnam was convicted of directing the biggest hedge fund insider-trading scheme in U.S. history. At the trial, the government introduced 45 wiretap recordings, along with documents and testimony derived from the wiretaps.

Yesterday, one of Rajaratnam’s sources of illicit information, former Goldman Sachs Group Inc. (GS) director Rajat Gupta, was sentenced to two years in prison for insider trading. While the evidence against Gupta was circumstantial, prosecutors at his trial played some recordings of his conversations with Rajaratnam.

Gupta’s lawyers said they also planned to challenge the legality of the wiretaps on appeal.

The wiretaps were central to the government investigation of Rajaratnam and dozens of others. Beginning in 2008, the Federal Bureau of Investigation recorded more than 2,200 calls between Rajaratnam and 130 business associates, friends and family over nine months.

Key Details

Before Rajaratnam’s trial, U.S. District Judge Richard Holwell held a hearing on whether the wiretaps should be excluded from the trial, as defense lawyers had wanted. He refused, finding that while prosecutors acted “recklessly” in omitting key details of an earlier Securities and Exchange Commission probe of Rajaratnam, the omissions weren’t sufficiently “material” to throw out the warrant.

During today’s argument, Millett argued that prosecutors violated federal law by deceiving the judge who authorized the wiretaps through their numerous “misstatements.” Prosecutors omitted important details about the scope, duration and methods of the SEC’s insider-trading investigation.

“In paragraph after paragraph” of the government’s wiretap request, “there were statements that had no reality,” she said. “You cannot ask for a wiretap without showing what you’ve done.”

Assistant U.S. Attorney Andrew Fish defended the U.S. wiretap request, saying prosecutors didn’t intend to mislead the lower court judge. If prosecutors had included details of the SEC investigation and the difficulties then confronting the agency in gathering evidence against Rajaratnam, the lower court judge would have been even more likely to authorize the wiretaps, he said.

Future Abuses

“No suppression is warranted,” Fish argued.

Cabranes appeared to agree with Fish, saying the omitted facts may have strengthened government’s wiretap request. Sack, on the other hand, asked whether important facts were “hidden” in the government’s wiretap request and if that constitutes recklessness on the part of the government.

Carney wanted to know how the appeals court would prevent future abuses by prosecutors if the panel didn’t reverse Rajaratnam’s conviction.

“What tools would be available to prevent this from happening tomorrow?” she asked the prosecutor. Fish replied that there wouldn’t be another such case because prosecutors are more cautious now.

The case has attracted wide attention in the legal community because it’s the first time the government turned to wiretaps to investigate insider trading. Robert Blakey, a professor at Notre Dame Law School in Indiana who is viewed as the architect of the wiretap statute, submitted a legal brief on behalf of Rajaratnam.

‘Glaring Omissions’

Kevin O’Brien, a partner a Harris, O’Brien, St. Laurent & Houghteling in New York and a former federal prosecutor, said prosecutors must follow strict disclosure rules before obtaining approval for a wiretap because wiretaps are so invasive.

“If you start making exceptions for glaring omissions, you loosen the compliance rules that govern wiretaps and pretty soon prosecutors will not take their disclosure responsibilities as seriously as they should,” he said in a telephone interview before the argument.

In the end, though, he agreed that the prosecutor’s omissions in their Rajaratnam wiretap request were “harmless,” and wouldn’t lead to a reversal.

The Rajaratnam appeal is U.S. v. Rajaratnam, 11-04416, U.S. Court of Appeals for the Second Circuit (New York); the Gupta case is U.S. v. Gupta, 11-00907, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Patricia Hurtado in New York at pathurtado@bloomberg.net; David Glovin in New York at dglovin@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.