The arrest of billionaire hedge fund investor Raj Rajaratnam on insider trading charges last October followed a familiar, theatrical script. Federal agents paraded the portly, Sri Lankan–born boss of New York–based Galleon Group past whirring cameras; the judge set bail at a whopping $100 million. But the case did break new ground in a way that’s alarming many U.S. financiers: Prosecutors announced it was the first time they had used wiretaps in a “significant” insider trading investigation.
It may not be the last. “Today, tomorrow, next week — privileged Wall Street insiders will have to ask themselves one important question,” warned U.S. Attorney Preet Bharara, who sits in Rudolph Giuliani’s former chair at New York’s Southern District, at a postbust press conference. “Is law enforcement listening?”
They’ll soon find out. On July 27, U.S. District Court Judge Richard Holwell will hold a hearing on whether the wiretap evidence at the center of the case against Rajaratnam should be suppressed. It’s a decision that could shape the way white-collar enforcement officials do their job — and how Wall Streeters, in turn, do theirs.
“The Department of Justice is increasingly using blue-collar tactics to investigate white-collar cases,” says Frank Razzano, a former assistant U.S. attorney and Securities and Exchange Commission enforcement official who now defends securities clients at Washington law firm Pepper Hamilton. Whereas the feds would once send a gentlemanly subpoena and wait for a suspect to appear with his or her lawyer, FBI agents now get a warrant to rip suspects’ offices apart or camp in their driveways to scare them into talking, says Razzano.
Bugging investors and traders may be just the latest aggressive tactic in the toolbox of prosecutors who have become increasingly tough on financial crime since the global crisis unleashed chaos on the markets two years ago. But the idea of eavesdropping on phone chatter — the lifeblood of financial markets — has cast a particular chill. “I was getting tons of calls from clients after Rajaratnam was arrested,” says Ross Intelisano, who represents hedge funds and family offices at New York law firm Rich & Intelisano. “People were in a panic.”
Rajaratnam’s defense team is fighting back. The reason the government has never bugged suspected insider traders’ phones before is that such surveillance is illegal, they argued in a May 7 motion to Judge Holwell. Wiretap authority was established by Congress in 1968 as part of a broader law-and-order bill called the Omnibus Crime Control and Safe Streets Act. The law enumerates dozens of suspected crimes that can warrant court-ordered electronic snooping — from kidnapping to pension fund embezzlement — but insider trading is not one of them.
When petitioning for the right to listen in on Rajaratnam, FBI agents told the judge they suspected him of two crimes that are tappable: money laundering and wire fraud. Neither appeared in his indictment. The defense, captained by John Dowd of white-shoe Washington firm Akin Gump, charged that the FBI was making an end run around the law. “The government’s . . . case has left [the statute] in shreds,” his motion to suppress the surveillance evidence asserts. The U.S. Attorney’s Office declined to comment.
Dowd’s argument gets support from some civil liberties watchdogs. “The insider trading charges seem to have piggybacked onto other allegations,” says James Copland, director of the Center for Legal Policy at the libertarian-leaning Manhattan Institute for Policy Research. “That’s disconcerting because wire fraud is so broad it could be used to wiretap almost any of us.”
Still, a full victory for the defense looks unlikely. “The point that this is the first securities case using wiretaps has virtually no legal significance,” says Daniel Richman, professor of criminal law at Columbia University Law School. “Insider trading has long been deemed chargeable as mail or wire fraud.”
About 200,000 Americans are covertly recorded by law enforcement every year, and 80 percent of their conversations have nothing to do with the investigation they stumbled into, says John Verdi, senior counsel at the Electronic Privacy Information Center in Washington. More than 80 percent of wiretap orders have historically been issued in drug-related cases. A small shift toward Wall Street could go a long way. Says Eugene O’Donnell, a former police officer and prosecutor who now teaches at John Jay College of Criminal Justice in New York, “What we’re seeing is a very early stage of what could be a whole new frontier in law enforcement.”
