Once Reserved For Drug Crimes, Wiretapping Takes Center Stage in White Collar Prosecutions

9/13/2013

“Today, tomorrow, next week, the week after, privileged Wall Street insiders who are considering breaking the law will have to ask themselves one important question: Is law enforcement listening?”

– Preet Bharara, U.S. Attorney for Southern District of New York

When the Omnibus Crime Control and Safe Streets Act (the “Act”) was passed in 1968, proponents called it a new weapon against organized crime and its growing involvement in the importation and distribution of narcotics. For the first time, federal law enforcement was permitted to wiretap conversations of criminals with suspected involvement in a variety of serious offenses, including organized crime, gang-related activities, and drug trafficking.

These techniques would prove to be a valuable addition to authorities’ arsenal in fighting blue-collar crime. Fast-forward forty-five years later. Where once reserved for violent and narco-related crime, the use of wiretaps has evolved to become a potent tool in the fledgling battle against white-collar crime.

Wiretaps: A History and Expansion

The use of wiretaps proliferated from the 1990s to the 2000s, with the amount of court-issued wiretap warrants surging from 1,190 in 2000 to 3,194 in 2010 – a nearly 200% increase. Their use, however, remained predominantly isolated to combating violent and drug-related crimes, owing partly to the strict process required for a judge to sign off. Indeed, many involved in passage of the bill recognized the fine line that existed between an individual’s privacy rights and authorities’ investigatory needs. The crafters recognized that any wiretap must be “conducted in such a way as to minimize the interception of communications not otherwise subject to interception,” with a focus on preventing unnecessary intrusion into the target’s privacy.

When the Act was passed, electronic surveillance was authorized only during the investigation of a list of enumerated offenses. This list did not include white collar crimes, and was initially limited to crimes pertaining to organized crime and narcotics. However, the list was expanded over time, eventually including crimes such as mail fraud, wire fraud, money laundering, bank fraud, and obstruction of justice in later amendments. Indeed, in early 2011, the Obama administration even proposed that wiretaps be authorized for prosecutions of criminal copyright and trademark offenses. Prosecutors also have the ability, as a result of Section 2517, to use properly obtained wiretap evidence to prosecute crimes that were not specifically listed in the Act.

Wiretaps Meet White-Collar Crime

While the use of wiretaps in white-collar prosecutions was not unprecedented, its use had largely been limited to isolated occurrences that lacked any coordination or significance. However, it was authorities’ decision to employ wiretaps in an insider-trading case that would mark the beginning of an unparalleled and aggressive entrance of wiretaps into white-collar crime jurisprudence.

In 2006, the Securities and Exchange Commission (“SEC”) opened an investigation into Raj Rajaratnam and his hedge fund, Galleon Group (“Galleon”), based on an uncanny pattern of well-timed trades that had resulted in handsome profits. Rajaratnam’s Galleon Group was an example of the many rags-to-riches stories on Wall Street, with Galleon rising to prominence based on an impressive record of above-average returns that were credited to aggressive analyst research. It quickly went from managing $830 million in its first year to over $7 billion at its peak. This resulted in immense wealth for Rajaratnam, with Forbes pegging him as the world’s 559th richest person in 2009 with a net worth of $1.3 billion.

Despite an extensive investigation that yielded millions of pages of documents, numerous interviews and subpoenas, and even sworn testimony from Rajaratnam himself, the investigation was generally not successful, and yielded little little evidence to support a case that Rajaratnam had engaged in insider trading. Indeed, unlike violent crime, drug-trafficking, or narcotic crimes, the underlying inherent acts of insider trading are inherently legal – there is no law against (attempting) to buy low and sell high in the high-stakes arena of Wall Street, where fortunes were regularly made (and lost). While the SEC gathered a substantial amount of circumstantial evidence pointing towards insider-trading, it was not viewed as enough to initiate a case against Rajaratnam.

After the SEC’s investigation stalled, criminal authorities at the U.S. Attorney’s Office in New York were brought up to speed. One year later, on March 7, 2008, United States District Judge Richard J. Holwell received a government request for a wiretap on Rajaratnam’s cell phone, with prosecutors explaining that “normal investigative techniques” had either been exhausted or had failed. Judge Holwell granted the request, and over the next nine months, the government would intercept over 2,000 calls between Rajaratnam and his accomplices. What followed would stun authorities as they discovered a deeply-entrenched insider-trading scheme with tentacles reaching deep into corporate America. By the end of 2008, authorities had amassed a treasure trove of information.

Among Rajaratnam and his group, the wiretaps showed that insider information was traded freely as a virtual currency For example, Rajaratnam disclosed in a call that “”I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share. The Street has them making $2.50.” In another call, after learning that a company would be making a favorable announcement, Rajaratnam declared that “I blew it out today, because, I just said, I need to get back to basics, I’m gonna become Mr. October.”

After learning that Rajaratnam was planning to leave the country, authorities brought criminal charges on October 16, 2009, charging Rajaratnam and five others with conspiracy and fraud charges. After surviving an attempt to have the wiretap evidence thrown out, the government obtained a guilty verdict, and Rajaratnam was sentenced to a record 11-year prison term. He is currently appealing the wiretap suppression before the Second Circuit Court of Appeals, with eight former federal judges filing amicus curiae briefs on his behalf.

The wiretaps used to convict Rajaratnam resulted in numerous additional convictions against Rajaratnam accomplices, including Danielle Chiesi, Anil Kumar, and Rajat Gupta, and have served as the impetus in what has been an extraordinarily successful focus by authorities on insider trading. Indeed, the statistics paint a telling story – The SEC has filed more insider trading cases in the past three years than any three-year period in history, and criminal authorities have obtained more than seventy convictions. Authorities have seized on this momentum, and many more cases are expected.

Wiretap Evidence Extends Beyond Insider-Trading Prosecutions

As wiretaps have become increasingly prevalent in insider trading cases, authorities have started expanding their use of wiretaps in the prosecution of other white collar crimes, including a “pump and dump” stock manipulation scheme, and a massive Ponzi scheme.

In the case of Timothy Durham, who was notoriously pegged as the “Midwest’s Madoff” after being convicted of running one of the largest Ponzi schemes in Ohio history, wiretaps played a pivotal role. In several recorded phone conversations between Durham and several of his co-conspirators, prosecutors captured conversations about plans to hide financial irregularities, how to handle investor redemption requests, and even the possibility of jail time for their actions. Armed with this evidence, a jury convicted Durham and his associates, and Durham later received a 50-year prison sentence – well above the average sentence for the amount of estimated losses.

Future Implications of Wiretaps in Investigating White-Collar Crime

As authorities become increasingly comfortable in using wiretaps to prosecute a growing variety of white-collar crime, the legal community is taking notice. Michael Volkov, a noted authority in the increasingly popular area of Foreign Corrupt Practices Act (“FCPA”) litigation, recently authored an article warning that wiretaps could soon extend to FCPA prosecutions. In a conversation with Forbes.com, Volkov noted that the FBI had recently arrested a senior executive of a mining company for FCPA and obstruction of justice violations based on recordings made by a cooperating witness. According to Volkov,

“There is no question that federal prosecutors will and want to use a wiretap to investigate and prosecute high-level executives who may be violating the FCPA.”

Volkov’s comments reflect a growing consensus that federal authorities would welcome the opportunity to employ wiretaps in previously-untested legal areas such as FCPA prosecutions As a surge in the use of wiretaps has proven successful in rooting out white-collar crime, authorities have not only touted their successes, but also insinuated that this approach could serve as a model blueprint. U.S. Attorney Preet Bharara stated in a recent speech that

“This aggressive use of wiretaps is important. It shows that we are targeting white-collar insider trading rings with the same powerful investigative tools that have worked so successfully against the mob and drug cartels.”

Bharara warned, after Rajaratnam was convicted, “When sophisticated business people begin to adopt the methods of common criminals, we have no choice but to treat them as such. But some have urged restraint. Peter J. Henning, a professor at Wayne State University Law School and expert on white collar crime, authored a blog post at the New York Times’ Dealbook urging that wiretaps be used very carefully, and warning that

The Justice Department needs to be careful, however, that it does not become so enamored of this tool that prosecutors rush to use it when it will not be effective, or worse, ignore the complex requirements for tapping telephones.

Authorities have amassed an impressive record fighting insider-trading that has been bolstered by the use of wiretaps. Indeed, the statistics are daunting – over seventy convictions and not a single acquittal over the past few years. However, while this streak has emboldened authorities, the war is far from over. Rajaratnam is currently appealing his conviction, arguing that the wiretaps should be thrown out. And as authorities increasingly turn to wiretap evidence, there is the chance that future court decisions will restrict, rather than increase, the use of wiretaps. Finally, there is the threat that criminals will stay a step ahead of authorities by embracing the latest and greatest technology, such as untraceable conversations or dialogues. But all can agree on one thing – the criminal activity will continue.

Jordan Maglich is an associate at Wiand Guerra King P.L. in Tampa, Fla. His practice areas include complex business litigation, securities arbitration matters, and financial litigation. For questions or comments about this article, please contact Jordan at 813-347-5100.

Jordan D. Maglich published the article, Once Reserved For Drug Crimes, Wiretapping Takes Center Stage in White Collar Prosecutions, in the Fall 2013 issue of The Federal Litigation Section of the Federal Bar Association.

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This article was published by the Federal Litigation Section, Federal Bar Association, Fall 2013.