Wiretapping: a New Tactic for Prosecutors in White-Collar Cases

Hedge-Fund Mogul Raj Rajaratnam Sunk by Wiretap Evidence

Last month, a U.S. District Court jury in New York convicted Raj Rajaratnam, co-founder of hedge giant The Galleon Group, of fraud and conspiracy after two and one-half weeks of deliberation. As the principal player in the nation’s largest illegal stock-tipping case since Ivan Boesky in the 1980s, Rajaratnam may be compelled to surrender millions in profits gained from his illegal activities. He also faces potentially 25 years in prison when he is sentenced on July 29.

A major player on Wall Street, Rajaratnam became the target of the government’s latest concentrated effort to stop insider trading in large part because of his success. After graduating from the Wharton School at the University of Pennsylvania, Rajaratnam rapidly ascended the ranks of Wall Street. In 1997, at the age of 39, he founded The Galleon Group with three other colleagues from Needham and Company. The Galleon Group rapidly distinguished itself as an innovator. In its first year it managed $830 million in assets. At its zenith, it managed over $7 billion.

According to Rajaratnam, the distinguishing feature of his fund was the aggressive research performed by his analysts. While the government conceded the fund did perform extensive studies of the publicly traded companies it invested in, government lawyers disputed defense claims that Galleon’s success could be entirely attributed to tracking down publicly available information. Galleon traders provided the prosecution with troubling testimony about the firm’s practices and culture. The hedge-fund managers stated that they were pushed to do whatever was necessary to obtain information about a company’s quarterly revenue, earnings, contracts and takeovers.

A major issue in the trial was the damaging admission into evidence of over 40 wiretapped telephone conversations Rajaratnam had with sources. Rajaratnam could be heard receiving confidential information from informants. The defense’s motion to have the recordings excluded from trial was denied in November, setting the stage for Rajaratnam’s eventual conviction. Jurors stated the recorded conversations significantly bolstered the prosecution’s position and played a significant role in their deliberations.

The Basics of Wiretapping

Wiretapping has typically been used for building cases against organized-crime families and drug traffickers. The jump to white-collar crime marks a bold new direction in government prosecution.

With such a powerful tool, the government can be expected to use wiretapping extensively in future insider-trading investigations. Prosecutors should not expect this new tactic to go unchallenged. Wiretapping raises significant concerns over privacy rights. Defense attorneys are likely to heavily scrutinize and aggressively challenge the use of wiretap evidence in the white-collar criminal arena.

Title III of the Omnibus Crime Control and Safe Streets Act of 1968 is the existing law governing wiretapping. The law was created to help law enforcement officials fight crime effectively, while theoretically guarding an individual’s right to be protected from unreasonable searches and seizures.

Before a judge may issue a wiretap order, he or she must be satisfied that all of the following requirements have been met:

• Sufficient probable cause exists to believe an individual is committing a prohibited offense.
• Sufficient probable cause exists to believe that communications about that crime will be obtained through the use of a wiretap.
• Traditional methods of investigation have either been unsuccessful, likely to fail or would be too dangerous to attempt
• Sufficient probable cause exists to believe the place or facilities where the wiretap will be utilized are being used or will be used to commit the crime stated.

Wiretap laws are also specific about the contents of the wiretap orders themselves. Orders must be narrowly tailored to the person being recorded, the location of the wiretap, the materials to be intercepted, the persons authorized to execute the wiretap and the length of time approved for gathering the evidence.

Recent Michigan Cases

White-collar cases are not confined to Wall Street. The government is aggressively pursuing purported Ponzi schemers in Michigan. According to the Securities and Exchange Commission, “A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.”

John Bravata, a Brighton, Mich., entrepreneur, was arrested by federal agents in May. Bravata, who is currently facing allegations of fraud brought by the SEC, is being criminally charged by the U.S. Attorney’s Office with one count of wire fraud stemming from an alleged Ponzi scheme he built with his real estate development business, BBC Equities.

Bravata is accused of lying to investors regarding how their investments would be used, how secure they were and how much profit could be expected. The criminal complaint alleges Bravata converted funds earmarked for real estate investment directly into his pocket. The prosecution believes Bravata paid himself approximately $3.5 million in wages and commissions between 2006 and 2009. Investors were supposedly told he would receive nothing. He is currently free on a $100,000 bond.

Two other Michigan men are similarly accused of running a Ponzi scheme. On June 3, 2011, the Securities and Exchange Commission filed civil charges against Ronald Abernathy and Arthur Weiss, alleging $560,000 in securities fraud violations. Abernathy and Weiss created an investment company, Sovereign International Group, LLC, which was supposed to invest in securities, art, precious metal ores and other capital ventures.

The complaint states the men baited potential investors with lies. Abernathy and Weiss allegedly told investors that they were going to be purchasing a Major League Baseball franchise with fellow investors, Ted Turner and Paul Allen. According to the filing, neither of the men invested any of the money they received from investors. They simply paid out the funds to other investors or used the money for their own personal expenses.

If you are being accused of creating a Ponzi scheme, insider trading or any other white-collar crime, it is crucial you receive good advice from an experienced attorney. You should contact a local criminal defense lawyer to discuss your alternatives.