Litigation: Beware of blue collar techniques in white collar investigations

DOJ and SEC turn to wiretapping and informants to prosecute corporate crimes

When you think about secretive law enforcement techniques such as wiretaps and reliance on confidential informants, you probably imagine gritty TV dramas like HBO’s “The Wire” and “The Sopranos” or Fox’s “24.” And understandably so. Historically, the government has used wiretaps and informants to snare “blue-collar” criminals in investigations related to drug dealing, organized crime and terrorism. 

However, in the last few years—and even more so in the last year—the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have demonstrated they intend to use these historically blue-collar law enforcement techniques as part of their white- collar investigations. The most prominent use of these tactics was in last year’s trial of hedge fund manager Raj Rajaratnam in New York. The DOJ’s ability to play wiretap recordings of Rajaratnam’s telephone conversations proved to be instrumental to its successful prosecution of Rajaratnam for insider trading. 

In today’s world, where many jurors have come to believe every case should proceed like an episode of CBS’ hit show “CSI,” the use of wiretaps can be an especially powerful tool. It doesn’t take a high-priced jury consultant to conclude jurors are more likely to be enthralled by the opportunity to hear the defendant’s own voice through wiretapped phone conversations or a face-to-face conversation recorded on a hidden wire worn by a confidential informant than they are to hear a government accountant trying to connect the dots between different sets of complex financial data. (Zzzzz….sorry, I nodded off to sleep typing the last part of that sentence.)

The DOJ and the SEC brass have expressed no reservations around the continued aggressive use of wiretaps in pursuit of their white-collar targets. The Assistant Attorney General for the DOJ’s Criminal Division said late last year that the fight against corruption is a top priority for the DOJ. The SEC’s Director of Enforcement has repeatedly said that the prosecution of insider trading cases remains one of the SEC’s top priorities. Those investigations are certain to involve the use of wiretaps and confidential informants. 

And don’t overlook the new whistleblower provisions created as part of the Dodd-Frank Act that provide whistleblowers with financial reward if their whistleblowing leads to financial recovery over $1 million. While it is too early to point to concrete evidence, there is little doubt the whistleblower provisions will result in a world where more employees or other insiders are working for the government as confidential informants. 

What does all of this mean? The single biggest lesson is that no business or individual should assume they are free from the risk of having their phone conversations recorded or from having a co-worker, director or friend report everything they learn to the federal government. It also means businesses must take meaningful steps to identify and address—as early as possible—any misconduct before it turns into a problem that the government deems necessary to investigate. The best way to accomplish that goal is to have an effective compliance program. Not only will an effective compliance program help businesses have a better shot at identifying rogue actors or other problems before they snowball out of control, but companies with effective compliance programs also are more likely to be able to convince a prosecutor that the bad actor’s conduct was isolated and anomalous (thereby hopefully avoiding prosecution all together).

If a company is unsuccessful in avoiding prosecution, a compliance program that is effective in its design and implementation may be the most important factor in that company being eligible for substantially reduced penalties should they end up on the wrong side of a criminal case.  

Contributing Author

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John Fagg

John Fagg is a member in Moore & Van Allen's Litigation Group. In addition to being an experienced trial lawyer, Mr. Fagg has extensive experience...

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Contributing Author

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Valecia McDowell

Valecia McDowell is a member in Moore & Van Allen's Litigation Group. Ms. McDowell has extensive experience conducting internal investigations for publicly-traded, privately-held and non-profit...

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