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Corporate Oct 26, 2012

Were wiretaps properly authorised in Galleon case?

By Uttara Choudhury

New York: Did US Attorney Preet Bharara rely too much on evidence collected from unauthorised, cloak-and-dagger telephone tapping in the Galleon insider trading trial? The Second US Circuit Court of Appeals will tell us through a decision in coming months.

A three-judge panel on Thursday looked at the ramifications of a potential reversal of Galleon hedge fund founder Raj Rajaratnam's conviction as it heard arguments on whether wiretap evidence should have been allowed at his trial. His lawyers say a government misstep early in the investigation relating to aggressive phone snooping should set him free.

Rajaratnam's lawyers are relying on a legal loophole. If a wiretap is not properly authorised, US law prohibits using the secret recordings as evidence at a trial.

"For Rajaratnam, that would lead to reversal of his convictions because the wiretaps were crucial to proving the case," said The New York Times.

Raj Rajaratnam.

Turns out that under the federal Wiretap Act, prosecutors must demonstrate the necessity of using a wiretap by providing a federal district judge with "a full and complete statement as to whether or not other investigative procedures have been tried and failed."

The NYT explained that Congress put this requirement into the law to ensure that wiretaps were not a first choice for investigating a case because they involve such a significant invasion of privacy.

Now here lies the rub: In addition to Rajaratnam's filings, a group of eight former federal judges have submitted a brief arguing that the wiretap evidence should be suppressed because there was "inadequate disclosure" in the government application requesting permission to listen in on Rajaratnam's mobile phone conversations.

If Rajaratnam walks, so does Rajat Gupta

The 45 wiretaps showing how Rajaratnam traded on illegal tips were the key to his conviction on 14 counts of securities fraud. He is currently serving 11 years, one of the longest prison terms in history for insider trading. These controversial wiretaps helped Bharara's office secure another 69 convictions, including former Goldman Sachs director Rajat Gupta, who was sentenced on Wednesday to two years in prison and fined $5 million.

Rajaratnam's lawyers argued on Thursday that in a March 2008 affidavit to US District Judge Gerard Lynch seeking authorisation for the use of wiretaps, investigators intentionally left out key information relating to a US Securities and Exchange Commission's parallel probe. Rajaratnam's lawyers are arguing that the decision by a different judge to allow the tapes to be played at Rajaratnam's trial was wrong.

"Some legal observers believe it isn't inconceivable that Mr Rajaratnam's conviction could be reversed, an outcome that would open the door for appeals in roughly a dozen other convictions that stemmed from the same wiretap evidence used against the hedge-fund manager, including Mr Gupta," said The Wall Street Journal.

The Journal said that in the case of a reversal, the government could retry Rajaratnam but would be precluded from using any wiretap evidence. "The government likely would build a case based on other evidence, including witness testimony, emails and trading records that show how Mr Rajaratnam's trades were timed perfectly to benefit from announcements made by public companies," it added.

Rajat Gupta to also challenge wiretaps

Gupta's lawyer Gary Naftalis told Judge Jed S Rakoff that he would file an appeal challenging the judge's decisions on evidence during the trial, including allowing the use of a recording of a wiretapped phone call.

"Gupta maintains his innocence and will vigorously pursue an appeal,'' Naftalis said. ''We continue to believe that the facts of this case demonstrate that Mr Gupta is innocent of all of these charges, and that he has always acted with honesty and integrity.''

Perfect Hedge

The Galleon case was part of a federal initiative by Bharara's office and the Federal Bureau of Investigation in New York, codenamed "Perfect Hedge." Bharara played a key role in the largest mob roundup in recent FBI history by using wiretaps against the Gambino and Colombo crime families. The Galleon case is the crown jewel of Bharara's work to date and to collect those scalps, Bharara has, some say, played rough by using wiretaps and strong arm tactics he first employed against the mob.

It remains to be seen whether Bharara's "Perfect Hedge" will unravel as both Rajaratnam and Gupta mount their appeals. But it is rare for an appellate court to overturn jury convictions, and it is even less common to have a case overturned because of omissions in a wiretap application.

by Uttara Choudhury

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