NEW YORK (Reuters) - A panel of judges on Thursday will hear arguments that U.S. prosecutors should not have been able to play dozens of FBI wiretaps at the criminal trial of hedge fund tycoon Raj Rajaratnam, a closely watched appeal in one of the biggest insider-trading cases in a generation.
The Galleon Group founder is serving an 11-year prison term, one of the longest ever for insider trading. If he wins a reversal of his conviction, it would be a huge blow to one of the centerpieces of the Justice Department’s efforts to stamp out illicit trading on Wall Street.
A three-judge panel of the 2nd U.S. Circuit Court of Appeals in New York will hear arguments in the case. An immediate ruling is unlikely. Rajaratnam, 55, is imprisoned in Massachusetts and is not expected to attend.
The government’s decision to covertly record Rajaratnam’s phone conversations with traders and corporate insiders -- a technique traditionally reserved for investigations of drug-trafficking and organized crime -- sent a chill through the secretive hedge fund industry. Rajaratnam’s lawyers argue that investigators left out key information in seeking court approval of their wiretap application in 2008.
The one-time billionaire has gotten some backing in his appeal, including a friend-of-the-court brief from a legal expert considered the architect of the U.S. wiretap statute, G. Robert Blakey, a professor at Notre Dame Law School in Indiana,
“Bluntly, they lied,” Blakey, in a telephone interview with Reuters, said of investigators. He said he believes, however, that Rajaratnam’s conviction was “righteous.”
Blakey wrote in his brief that the trial judge, Richard Holwell of U.S. District Court in Manhattan, misinterpreted the statute and should have suppressed the evidence. Blakey is the author of the “Blakey Bill,” which became the model for key language of Title III of the Omnibus Crime Control and Safe Streets Act of 1968, which governs the use of wiretaps.
Holwell decided to allow the wiretaps despite finding in November 2010 that the government left out information in its application to the U.S. District Judge Gerard Lynch. Rajaratnam also argues that Lynch, who now sits on the appeals court but cannot hear this case, was misled about a key government cooperator, former trader Roomy Khan.
The U.S. Attorney’s Office in Manhattan, which prosecuted Rajaratnam, has defended the wiretaps. In court papers, prosecutors argue that investigators had made “innocent mistakes” that were immaterial. They declined further comment.
Holwell, now in private practice, also declined to comment on the appeal, as did Rajaratnam’s defense lawyers at law firm Akin Gump Strauss Hauer & Feld.
Eight retired federal judges, including former Chief U.S. District Judge John Bissell in New Jersey, also filed a brief to the 2nd Circuit, voicing concern about Holwell’s ruling. Neither their brief nor Blakey’s was solicited by any party, according to the court filings.
Rajaratnam was convicted of 14 counts of securities fraud and conspiracy in May 2011, but only after his sentencing five months later was he allowed to appeal the wiretap evidence used at his trial. He also seeks reversal on nine of the 14 counts he faced, citing flawed jury instructions.
If his appeal is successful, Rajaratnam could ask for a new trial using evidence other than the phone recordings. In that case, prosecutors could use emails, trading records, phone logs and the testimony of several former Rajaratnam associates. That evidence could still add up to a strong case.
The appeal is not expected to have an effect on the guilty pleas of scores of other people caught in the government’s insider-trading crackdown of the last four years. Those defendants waived rights to appeal when they pleaded guilty.
Over the past four years, wiretaps helped prosecutors convict scores of money managers, traders, consultants, lawyers and a former Goldman Sachs GS.N board member, Rajat Gupta, in the government’s wide-ranging trading probe. Gupta was convicted in June of tipping Rajaratnam with corporate secrets. He faces sentencing on Wednesday.
On one of the wiretaps, from September 24, 2008, Rajaratnam is heard telling an employee that he received a call “saying something good might happen to Goldman.” It referred to Gupta telling Rajaratnam the previous day, at a crucial point in the financial crisis, that investor Warren Buffett would infuse $5 billion into the bank.
To be able to tap a phone, an investigator must present an affidavit including a summary of the evidence of a crime to that point, giving a judge probable cause to grant the application.
The wiretap statute calls for “a full and complete statement” that the probe could not progress using conventional techniques.
Former prosecutor and investigator Bob Milan, of Mesirow Financial Consulting in Chicago, said that no matter the outcome of Rajaratnam’s appeal, the case was instructive “to make sure everybody is using best practices when they apply for wiretaps, that they are complete and thorough.”
The case is USA v Raj Rajaratnam in the 2nd U.S. Circuit Court of Appeals No. 11-4416.
Reporting By Grant McCool; Editing by Martha Graybow and Leslie Adler