Galleon Group LLC founder Raj Rajaratnam and former hedge fund consultant Danielle Chiesi lost a bid to block the first-ever use of wiretap evidence in an insider-trading trial.
U.S. District Judge Richard J. Holwell in New York ruled yesterday the government complied with federal wiretapping laws in its investigation of both defendants. Theirs is the largest insider-trading case involving hedge funds.
Holwell’s ruling will probably be harmful to Rajaratnam and Chiesi at their January trial, said Andrew Hruska, a former federal prosecutor now at the law firm King & Spalding LLP. Criminal defendants “tend to plead guilty” in cases where prosecutors have recordings, said Hruska, who isn’t involved in the Rajaratnam case and doesn’t know what’s been recorded.
“Jurors like tapes,” Hruska said in an interview after the ruling. “They can be extremely convincing.”
A Rajaratnam spokesman, Jim McCarthy, and Alan R. Kaufman, a lawyer for Chiesi, declined to comment.
Rajaratnam, 53, was arrested last year and is the central figure in a probe of insider trading at hedge funds that has led to 14 guilty pleas. He and Chiesi, a former consultant at New Castle Funds LLC, deny wrongdoing. They are accused of using illegal tips from company executives, hedge fund officials and other insiders to earn millions of dollars.
At a hearing last month, Rajaratnam’s lawyer John Dowd argued that prosecutors failed to comply with federal laws by not disclosing to judges who approved the wiretaps key facts about the government’s investigation, including details about the government’s star witness, Roomy Kahn. Holwell disagreed in a 68-page opinion.
“Rajaratnam has shown that the government’s application omitted and misstated important information regarding the credibility of a key government informant, Roomy Kahn, but suppression is not required because the remainder of the affidavit demonstrated ample reason to find probable cause,” the judge wrote.
Evidence at the hearing showed that the government secretly recorded about 2,400 conversations between Rajaratnam and more than 130 friends, business associates and alleged accomplices.
At a trial, conversations that Rajaratnam and Chiesi had with others who are not charged, or references they made to other people, probably will be heard in court.
Lots of Names
“You’re likely to hear a lot of other names on the tapes,” Hruska said.
The contents of the wiretaps have not been disclosed. A prosecutor said after Rajaratnam’s arrest that they show him engaged “in a veritable smorgasbord of insider trading.”
In a separate ruling yesterday, Holwell partly granted a request by Rajaratnam and Chiesi to be tried separately on some crimes they’re not both accused of. Holwell suggested they can be tried together on some counts. He invited lawyers in the case to offer proposals.
In his wiretap ruling, Holwell said that prosecutors failed to disclose to judges approving the taps the nature and extent of a prior investigation of Rajaratnam by the U.S. Securities and Exchange Commission. He called those omissions “troubling to say the least.”
At the same time, he said, the SEC’s years-long probe failed to uncover Rajaratnam’s alleged insider trading ring and was unlikely to do so because its participants “conducted their scheme by telephone.” Had prosecutors disclosed the SEC probe, it “would ultimately have shown that a wiretap was necessary and appropriate,” the judge said.
The case is U.S. v. Rajaratnam, 1:09-cr-1184, U.S. District Court, Southern District of New York (Manhattan).