Rajaratnam challenges legality of US wiretaps

Wednesday, 6 October 2010 00:35 -     - {{hitsCtrl.values.hits}}

Reuters: Galleon hedge fund founder Raj Rajaratnam is challenging the legality of recording his private conversations by investigators in an insider trading probe, calling on a US prosecutor and an FBI agent to testify at a special evidentiary hearing that started on Monday.

The case marks the first wiretaps used in a widespread probe of insider trading on Wall Street and an eventual ruling by the judge on whether the wiretap evidence is to be thrown out will be significant to Rajaratnam’s trial in January.

Wiretaps are an investigative tool normally used in drug and organised crime cases. Rajaratnam and principal co-defendant, former New Castle Funds LLC trader Danielle Chiesi, were arrested on 16 October 2009.

They face as many as 20 years in prison if convicted on conspiracy and securities fraud charges. Both denied any wrongdoing in a case prosecutors describe as the biggest probe of allegations of insider trading at hedge funds in the United States.

Rajaratnam’s lawyer, John Dowd, told Monday’s Manhattan federal court hearing that, in applying for wiretap permission in March 2008, an FBI agent failed to tell a judge about prior lengthy probes of his client by securities regulators and the FBI.

Dowd said it showed “contempt” for the process and prevented the judge from making an independent decision on whether or not to approve the wiretaps.

A US prosecutor, Jonathan Streeter, responded the US Securities and Exchange Commission was mentioned six times in an affidavit by FBI agent B.J. Kang seeking court approval for wiretaps.

The relatively uncommon pretrial evidentiary hearing was scheduled to continue on Tuesday.

Rajaratnam is calling on four witnesses, including Kang, a current prosecutor, a former prosecutor and Galleon’s former in-house counsel.

Streeter told the judge evidence showed none of the three current or former government employees “were being knowingly deceitful or engaging in the kind of recklessness that calls for the sanction of suppression of evidence.”

Rajaratnam’s lawyers were entering evidence regarding four million documents and transcripts of investigators’ interviews with Rajaratnam and employees of his fund, which once managed $7 billion. Galleon was wound down after Rajaratnam’s arrest.

Dowd said the information would “show beyond any doubt that every single one of these facts were known to Kang and omitted.” The lawyer said the wiretap application was “pure boilerplate copied from an earlier application”.

US District Judge Richard Holwell granted the hearing in August, ruling that Rajaratnam made a “substantial preliminary showing” that investigators “knowingly or recklessly” omitted facts in seeking permission to record his conversations.

Another Rajaratnam lawyer, Terence Lynam, on Monday questioned prosecutor Andrew Michaelson, who investigated Galleon for the civil enforcement division of the SEC and was then transferred to the criminal case.

“I agree that the authorities were working closely together,” Michaelson replied in court to a question about the partnership in the case of the SEC, the FBI and the office of the US Attorney in Manhattan.

The case is USA v Raj Rajaratnam et al, US District Court for the Southern District of New York, No. 09-01184.