Galleon Case Shows Lengths Feds Go To During Investigations

One of the largest insider trading cases ever began to unspool in October 2009 with the arrest of Raj Rajaratnam, founder of the Galleon Group hedge fund. Prosecutors allege Rajaratnam was at the heart of a massive insider trading scheme that illegally generated more than $50 million. Galleon, which had almost $3.7 billion in investments, was liquidated within weeks.

Rajaratnam and 20 others--traders, lawyers and corporate executives--were charged in October and November with a litany of criminal and civil violations. So far 10 defendants have been indicted, 10 have pleaded guilty and one is at large.

Several of the defendants who pleaded guilty are cooperating with investigators. Insider trading cases--which can be notoriously difficult to prove--often turn on flipping defendants. But in this case the feds had another trick up their sleeve.

The sprawling investigation relied heavily on wiretaps, a controversial tactic seldom seen in white-collar cases. It's yet another signal that no tools are off limits in federal prosecutors' pursuit of financial criminals.

Damning Evidence

"Wiretaps have been used in all kinds of cases, but it's not the most common method in a white-collar crime case to build evidence," says Wendy Wysong, a white-collar partner at Clifford Chance. "Frankly, in insider trading cases, I'm not sure why it's not done more often."

Insider trading is difficult to charge because the evidence is largely rooted in coincidence. Investigators may know that a telephone call was placed from an insider to a trader, that moments later a massive divestiture in a company was made, and that the next day heavy losses were reported by that company. It's easy to draw conclusions about the nature of the phone call, but such speculation is not great evidence in court.

So prosecutors often lean on cooperating witnesses to wear wires to gather more overtly incriminating evidence. But cooperating witnesses are usually dirty themselves--often trying to wiggle out of their own mess by throwing someone else under the bus. It makes the information they gather inherently suspect.

Wiretaps provide the perfect smoking gun to incriminate inside traders, capturing the exchange of information and often documenting the intent to act on it as well. Prosecutors allege the tapes in the Galleon case--more than 14,000 hours of conversations recorded by the FBI--do just that.

"Quite frankly, wiretaps are great evidence in these types of cases," Wysong says. "But prosecutors that work in this area don't think about wiretaps right off the bat. They're not as experienced [with wiretaps] as narcotics or homicide prosecutors, and the process you have to go through is very difficult."

Tough Warrant

Wiretaps are undeniably effective but are perhaps the most invasive form of criminal investigation, rife with privacy issues and always controversial. The wiretap statute closely constrains the types of crimes for which they can be employed. Most are matters of life and death--kidnapping, murder, child pornography--or national security. But a surprising number of white-collar crimes can also qualify, including money laundering, concealing assets, wire fraud and bank fraud.

The reason wiretaps don't crop up more often in white-collar cases, experts say, is that authorization is particularly hard to come by.

"It's very difficult to get a warrant," says Patricia Pileggi, a white-collar partner at Schiff Hardin. "One of the things you have to demonstrate, to the Department of Justice [DOJ] as well as to a district court judge, is that alternative investigative techniques have been tried and they have failed."

That's not as tough in an organized crime context, where infiltrating a criminal organization can be impossible or prohibitively dangerous.

"You can say, 'We have a very limited ability to get undercover agents into this or confidential informants who will wire up and record,'" Pileggi says. "But often in white-collar cases, you do have the ability to use somebody who can make consensual recordings with the targets of your investigation."

Typically, white-collar prosecutors either have other options or don't feel wiretaps are worth the extra effort, time and expense--but not always.

"For insider trading cases, I would think that wiretaps provide the best type of evidence, and Galleon has very much demonstrated that," Wysong says. "The conversations they recorded are crucial to obtaining a conviction, which is probably why the defense is fighting so hard to suppress them."

Disclosure Battle

The defense and prosecution in the Galleon case are fighting an ongoing battle over whether the wiretaps were recorded lawfully and with whom they should be shared. Although the DOJ often collaborates with civil investigators, there are limits on information-sharing.

The FBI made the recordings and gave them to prosecutors, who in turn provided them to defense counsel as a part of pre-trial discovery. On Feb. 9, a federal judge ruled that the defense must hand the wiretaps over to the Securities and Exchange Commission (SEC) as part of the civil investigation. Defense counsel have so far refused to comply.

Further complicating matters, the SEC admitted in early February that, in violation of disclosure rules, prosecutors mistakenly gave the agency some of the recordings. The convoluted squabble underscores the fact that while wiretaps are killer evidence in theory, they can be tricky in practice.

There are many grounds for suppressing wiretaps, including insufficiency in demonstrating necessity, misleading statements and improper disclosure.

"These days, judges and courts are not giving prosecutors the benefit of the doubt," Wysong says. "If you got a judge that felt like the prosecutors had overstepped their bounds and were too aggressive, or they felt like these wiretaps had offended the conscience, that would be a basis for not allowing them."

It will be a while before the dust settles--rulings have split as to whether the criminal trial should precede civil proceedings. But in whatever order the trials fall, the white-collar bar is keeping a close eye on the case. It's neither a trendsetter nor a one-off, experts say, but yet another indication of the greater intensity and broader tactics prosecutors are bringing to financial crimes investigations.

"What you're seeing is a marshalling of all of the tools that are available to prosecutors," Wysong says. "They are figuring out which ones they may not have considered before and which ones might be effective, even though they hadn't been the most common tools used in particular cases."

Contributing Author

Steven Andersen

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