Galleon Group LLC co-founder Raj Rajaratnam, facing insider trading charges, asked a judge to throw out government wiretaps of 2,400 of his conversations and evidence prosecutors gathered after listening to them.
Rajaratnam filed a legal request yesterday in Manhattan federal court, where he faces an October trial in the largest hedge fund insider trading case ever. Along with government witnesses who will testify against Rajaratnam, the wiretaps are a critical piece of prosecution evidence.
Defense attorney John Dowd argued in court papers that prosecutors violated the Constitution by misleading the judge who gave permission to tap Rajaratnam’s mobile-phone calls. Prosecutors misled the judge about the background and reliability of a key government witness, Roomy Khan, and falsely claimed her phone conversations with Rajaratnam included tips based on inside information, according to Dowd.
“In its zeal to break new ground and in an effort to salvage its nine-year pursuit of Mr. Rajaratnam, the government violated its obligation of candor and forthrightness to the court,” Dowd said in the filing. “The government obtained the court’s authorization to use wiretaps based on the sworn affidavit of an FBI agent that was rife with ‘deliberately or recklessly’ false statements.”
The filing seeks to exclude evidence of more than 2,400 of Rajaratnam’s conversations with at least 130 colleagues, employees, friends and family members over nine months in 2008.
If successful in persuading U.S. District Judge Richard Holwell to exclude the wiretap evidence from the trial, Rajaratnam’s lawyers may also seek to argue that some government witnesses who pleaded guilty after being caught on tape should be barred from testifying.
Rajaratnam, 52, is the central figure in an insider trading probe that has led to charges against 21 people, including 11 who have pleaded guilty, at least four of whom have agreed to testify against the Galleon co-founder. Prosecutors said Rajaratnam used secret tips from hedge fund executives, corporate officials and other insiders to earn millions of dollars in illegal stock trades. He denies the charges.
Co-defendant Danielle Chiesi, a New Castle Funds LLC consultant arrested last year with Rajaratnam, also filed a brief yesterday seeking to exclude wiretap evidence. Chiesi’s request was filed under seal.
Yusill Scribner, a spokeswoman for U.S. Attorney Preet Bharara, declined to comment on yesterday’s filing. Prosecutors have a May 28 deadline for filing a response, and a hearing is scheduled for June 17 before Holwell. Holwell may require testimony on whether prosecutors intentionally misled the judge in the wiretap application.
Rajaratnam’s lawyers also argue that Congress never authorized the use of wiretaps, which are commonly employed in terrorism or organized crime investigations, in cases of suspected securities fraud. The Galleon case is the first insider trading case in which wiretaps have been used.
Insider trading “is not an offense for which Congress has authorized the use of wiretaps,” Dowd wrote.
Dowd said prosecutors systematically misled the judge who approved the wiretaps about Khan, a former Intel Corp. executive. Rajaratnam’s lawyers said prosecutors failed to disclose that Khan had a 2002 conviction for insider trading, that she had earlier implicated Rajaratnam falsely, that she repeatedly lied to investigators, and that the information she and Rajaratnam shared with one another about three companies was public.
Had prosecutors made those disclosures, the judge wouldn’t have approved the wiretaps, Dowd argued.
“No sound basis would have remained for authorizing the exceptional intrusion of a wiretap in this case,” he wrote.
Dowd said prosecutors could have used a less intrusive method of investigating Rajaratnam, such as having an undercover agent seek a job at Galleon.
The defense filing provides now details about the investigation.
Dowd said prosecutors failed to tell the judge who approved the wiretaps that the government had spent nine years investigating Galleon and that Rajaratnam had given a seven-hour deposition to the U.S. Securities and Exchange Commission in 2007, part of which focused on suspicions of insider trading.
“Government investigators had spent literally months in Galleon’s offices examining records,” Dowd wrote.
Dowd traced the scrutiny of Rajaratnam to late 1998, when the FBI began investigating Khan after Intel complained she had stolen confidential information.
Khan then briefly worked in Galleon’s California office as an analyst before she was fired for trading in a personal brokerage account, according to Dowd. Khan later told investigators that Rajaratnam had used inside tips since 1997 and had boasted of sources inside Intel, Compaq Computer Corp. and Applied Materials Inc. -- an accusation prosecutors never substantiated, Dowd said.
Even after closing its criminal investigation of Rajaratnam in 2002, the SEC continued to probe Galleon from 2003 to 2007, with dozens of demands for documents, Dowd said. In 2007, after Galleon registered as an investment adviser, a team of SEC examiners scrutinized virtually every aspect of the firm’s operation, he said.
Rajaratnam cooperated fully and answered every question, including ones about former Intel employee Rajiv Goel, who pleaded guilty in February and is cooperating with prosecutors, Dowd said.
“At the same time as the Galleon examination, the SEC was also conducting a formal enforcement investigation of Sedna Capital Management, a hedge fund run by Mr. Rajaratnam’s brother, Rengan,” Dowd said. “Although Sedna had no affiliation with Galleon, it was clear by mid-2007 that the SEC was using the Sedna investigation to investigate Mr. Rajaratnam and Galleon for insider trading.”
The investigation of Rajaratnam “appeared” to wind down in late 2007, Dowd wrote. It didn’t. “Instead, it merely marked the point at which the government shifted from the conventional investigative techniques it had been using for the last nine years in favor of a wiretap,” he said.
Rajaratnam’s filing, which indicates his defense strategy, includes excerpts of conversations with Khan about Intel and Xilinx Inc. in which he merely repeats what he learned from Galleon’s analysts. It cites information, claimed by prosecutors to have been confidential, that was already public. Dowd said Rajaratnam did what any good fund manager would do --investigate stocks.
“Speaking to company representatives in order to gather publicly available information about the company, its supply chain, and its competitors was a routine part of the factual research that went into formulating Galleon’s investing strategies, including earnings previews,” Dowd wrote.
The brief also notes that Rajaratnam’s predictions about some stocks proved to be wrong. That indicates he didn’t have “an illicit inside pipeline to company information,” Dowd wrote.
The case is U.S. v. Rajaratnam, 09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).