June 24 (Bloomberg) -- Galleon Group LLC co-founder Raj Rajaratnam’s conviction for directing the most extensive insider-trading scheme in U.S. history was upheld by an appeals court, which ruled the government’s use of wiretaps was proper.
The U.S. Court of Appeals in Manhattan, in a decision issued today, affirmed Rajaratnam’s 2011 conviction for conspiracy and securities fraud and rejected his challenge to the use of wiretaps in a securities-fraud case.
The hedge-fund manager argued his conviction should be vacated because prosecutors misled the lower court judge who authorized the wiretaps in 2008. Rajaratnam, 56, claimed prosecutors and Federal Bureau of Investigation agents omitted key facts from their request for the secret recordings, called Title III wiretaps, including the existence of an insider-trading investigation by the U.S. Securities and Exchange Commission.
“Rajaratnam’s arguments are not persuasive,” U.S. Circuit judges Jose Cabranes, Robert Sack and Susan Carney said in a 29-page ruling. “The record does not support the finding that the omission of the SEC investigation in the Title III wiretap application was made with ‘reckless disregard for the truth.’”
The case was the first to focus exclusively on insider trading in which U.S. investigators wiretapped their targets’ telephone conversations, a tactic used in organized-crime probes. Jurors listened to more than 45 wiretap recordings, on some of which Rajaratnam can be heard gathering nonpublic information from his sources.
“Rajaratnam had been careful to exchange nearly all of his inside information by telephone,” the panel said, quoting U.S. District Judge Richard Holwell’s earlier ruling that allowed the wiretaps to be used during Rajaratnam’s trial.
“Wiretapping is particularly appropriate when the telephone is routinely relied on to conduct the criminal enterprise under investigation,” the panel said. “The district court made the point explicitly in discussing whether the government should have pursued additional ‘normal investigative procedures’ before seeking a Title III wiretap.’”
Benjamin Harris, a spokesman for Akin Gump Strauss Hauer & Feld LLP, the law firm that represented Rajaratnam at trial, declined to comment on the panel’s decision.
While Holwell, who presided over the trial, found that prosecutors may have acted with “reckless disregard” in omitting information from the wiretap applications, he allowed prosecutors to use the wiretaps. The appeals court today concluded that prosecutors and agents acted properly and the omitted information “would have only strengthened” the request.
The ruling comes as one of the sources of Rajaratnam’s illicit tips, former Goldman Sachs Group Inc. director Rajat Gupta, waits to hear from the same appeals court in his bid to overturn his insider-trading conviction based on the legality of the wiretaps.
Gupta, who was Rajaratnam’s former business partner, argues that prosecutors shouldn’t have been allowed at his trial to use wiretapped calls in which he wasn’t a participant. Gupta was sentenced to two years in prison for insider trading and is free pending his appeal.
Zvi Goffer, a former Galleon trader who worked for Rajaratnam and was also recorded on FBI wiretaps, has also challenged the government’s use of wiretaps. Goffer is serving 10 years at a federal prison in Lewisburg, Pennsylvania, after being convicted at a trial in New York in 2011.
Reed Brodsky, the former assistant U.S. attorney who prosecuted Rajaratnam and Gupta and is now in private practice as a partner at Gibson Dunn & Crutcher LLP, said that Rajaratnam’s next decision is whether to appeal to the U.S. Supreme Court.
“I think it’s a historic day, though, for the prosecution of insider trading cases,” Brodsky said in an interview with Bloomberg Television. “The court essentially said that the government did not in any way shape or form misrepresent facts or was reckless or intentionally omit facts from the wiretap application.”
While he declined to say what the ruling may mean for Gupta’s appeal, Brodsky said the appeals court’s ruling makes it easier for the government to win insider trading cases because prosecutors need only show that someone traded in a stock knowing they had inside information.
“I think prosecutors will take an aggressive view based on that opinion,” Brodsky said. “I certainly think it puts the wind at the back of the U.S. Attorney’s Office in continuing to use wiretaps if they continue to do so. I think it gives them enormous confidence that these wiretaps will be defended successfully on appeal.”
To date, more than 70 people, including portfolio managers, hedge fund analysts and employees at public companies have been convicted of insider trading since the Manhattan U.S. Attorney’s Office and the FBI in New York started a crackdown.
Rajaratnam, who oversaw a hedge fund that was among the 10 largest in the world in the early years of the last decade, was convicted by a jury on nine counts of securities fraud and five counts of conspiracy. He’s serving his 11-year prison sentence at the Federal Medical Center Devens in Ayers, Massachusetts.
Holwell also ordered Rajaratnam to forfeit more than $53.8 million and pay a $10 million fine.
Jerika Richardson, a spokeswoman for Manhattan U.S. Attorney Preet Bharara, whose office prosecuted the fund manager, declined to comment.
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-cr-00907, U.S. District Court, Southern District of New York (Manhattan).
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