Oklahoma Criminal Defense Blog

Raj Rajaratnam, founder of the hedge fund Galleon Group, has been found guilty by a jury after 7 weeks of testimony and 12 days of deliberation on all 14 of the counts on which he was tried.  He was convicted of nine counts of securities fraud and five counts of conspiracy.  The government’s case presented Rajaratnam as collecting insider information from his friends to use it to gain an advantage in the stock market.  Mr. Rajaratnam, 53, was convicted of making more than $50 million in gains – or avoided losses – by trading on the information furnished by a senior partner at McKinsey & Co., a senior vice president of IBM, a former Goldman Sachs director and others.

This is considered a significant prosecution among other reasons because of the unusually aggressive techniques used by the United States Attorney in a white collar crime.  The evidence at trial came principally from wiretap recordings of the defendant’s telephone conversations, along with the live testimony of some his alleged co-conspirators, who testified to cooperate their way out of prison.  Some observers believe the use of wiretaps in white collar crimes is a game changer.

Over three dozen tape recordings, some from wiretaps, were played to the jury.  The government claimed Raj based his trading on the tips he got from his inside sources, and the jury was persuaded of just that.   One of them was Anil Kumar, a former classmate at the University of Pennsylvania’s Wharton School, who gave Raj information about confidential negotiations between ATI Technologies and Advanced Miucro Devices before the deal was announced publicly.  Raj made $20 million from that deal according to the government’s evidence, and Raj promised to pay Kumar a $1million kick back, Kumar testified.

Since the verdict, juror Leila Gorman has discussed how she and other jurors viewed the evidence, and she said wiretaps were only part of the picture.   She said the jury looked at evidence of e-mails, matched conversations and graphs to make their own timelines of Raj’s stock trades.  The jury believed the timing of Raj’s trades just could not have been coincidental, she said.  Often they were made just minutes after conversations he had, discussing the stock then traded.  Ultimately for the jury, she said, there were too many conversations and things from the testimonies that pointed toward guilt, too many sticky facts.

Wiretaps have long been used by the federal government to prosecute organized crime and drug sales, as any criminal defense lawyer will tell you, but they are rare in white-collar crimes.  Some observers of the trial who concede white collar crimes may deserve more attention from prosecutors wonder why this focus on insider-trading in hedge funds, rather than the Wall Street meltdown of 2008-2009, whose costs are vastly greater.  Some wonder why no high executive has been prosecuted from any of the financial firms that failed so abjectly and required a massive infusion of tax-payer money.  Given that the explosion of hardly-regulated hedge funds generated more than two dozen billionaires, all the money ill-gotten from all the hedge funds does not approach the money lost in the Wall Street crash of late 2008, from which the American economy has not yet recovered.

Charles Ferguson, who made the movie about the financial crisis entitled, “Inside Job,”  which was awarded the 2011 Academy Award for a documentary film, while conceding insider trading is a serious crime urges the government should be giving a closer look at the people and firms that caused the financial melt-down.

Last year, the F.B.I. conducted simultaneous raids on three Wall Street hedge funds.  Two of those funds have since closed down.  Wall Street is certainly talking about it.  The U.S. Attorney for the Southern District of New York (i.e., Manhattan), Preet Bharara, has filed a civil lawsuit against giant Deutsch Bank, alleging it lied about the quality of mortgages in its portfolio under a government program.  When he filed the petition, Bhara said the government did not have evidence sufficient to merit a criminal prosecution.  The jury’s verdict marks the 35th conviction for Bharara.  Over the last 18 months, his office has brought criminal insider trading charges against 47 individuals.

The Securities Exchange Commission can bring only civil cases, and turns over criminal matters to the U.S. Department of Justice.  The SEC lacks wiretap authority, the muscle that federal prosecutors can use to meet the higher burden of persuasion for criminal cases, beyond a reasonable doubt.

Insider trading involves material information — something that would cause an investor to change his or her view of a publicly traded security — as well as nonpublic information. Cases can be brought against those who trade on inside information as well as those who provide it. The definition of what constitutes material, nonpublic information is not as clear as many believe, and the current run of cases is changing perceptions about how that line should be drawn.

University of Chicago law professor M. Todd Harrison gave the example of an investor looking for an earnings forecast for a company. The investor could get nonpublic information from a company’s chief financial officer, which he said would be illegal. Or the investor could develop his or her own forecast by piecing together small bits of information from company suppliers, former employees and other sources. Prosecution of Mr. Rajaratnam and others is giving hedge funds pause about their information-gathering techniques.

Questions about what constitutes insider trading are nothing new. The SEC’s view of what’s against the law has frequently been overturned in court.  In 1983, the U.S. Supreme Court overturned an insider trading case against Raymond Dirks, who advised institutional investors on insurance stocks. Mr. Dirks told clients to sell shares of Equity Funding of America based on information about fraud that he had received from a former officer and others inside the company.

The Supreme Court threw out the SEC’s claim of insider trading, ruling that people who provided the information wanted to expose the fraud, received no benefit from disclosing the nonpublic information and did not breach their duty to shareholders.  Courts have routinely disagreed with the SEC, but the U.S. Attorney’s success has caused concern in the financial world.

Raj Rajaratnam is charged in U.S. District Court for the Eastern District of New York with insider trading on the stock market.  A billionaire hedge fund manager, he is facing evidence of 2,400 telephone recordings of his own voice.  The government placed a tap on his telephone in 2008.

Not surprisingly, Rajaratnam’s lawyers are attacking this evidence.  A federal statute, United States Code, Title 18, Section 2516 identifies a list of crimes for which the government is authorized to record telephone conversations.  Securities fraud is not listed, but money laundering and mail fraud are listed, and these crimes are commonly charged along with securities fraud.

The government had to file an application for a judge to issue an order allowing the wire tap.  In that application, the government recited it needed the wire tap order because it was investigating violations of wire fraud and money laundering.  But the charges filed did not include those charges, so Rajaratnam’s attorneys  are attacking the application as disengenuous, as intended to find only evidence of securities fraud, which is not a valid basis for a wiretap order.  But the U.S. Attorney did specifically give notice it was seeking the wiretap for insider trading as the principal crime it was investigating.  If the defendant’s lawyers can prove the wiretap order would not have been granted if the whole truth were not told, the order could be invalidated and the recorded conversations suppressed.

It is true that the Wiretap Act does not mention securities fraud, but it is not certain that Congress intended to exclude wiretaps from the investigation of securities fraud.  Inferring the omission of something in a legislative enactment to be an affirmative declaration calls for an interpretation.  It is a rule of statutory construction in latin and therefore incontestible:  “Expressio unius est exclusio alterius,” which in English can be translated, “The expression of one thing implies the exclusion of what is not expressed.”
Ck spelling of latin phrase

Another avenue of attack on the application is focusing on the cooperating witness quoted in the application.  The F.B.I. agent’s affidavit quotes a woman named Roomy Khan extensively.  Rajaratnam’s lawyers claim the affidavit does not give a clear picture of her criminal past, the character of her conversations with the defendant, or the changing versions of her recitals.

The application described Ms. Khan as not having been charged with any other crime and had been cooperating with the government since 2007.   But the defendant’s lawyers claim she was charged with wire fraud in 2001 and agreed to cooperate with the government at that time.  Of course, the government will reply they were referring only to the present investigation.

The defendant also attacks what the wiretap application’s affidavit describes as Rajaratnam’s statements to Ms. Khan as conveying insider information, when if fact the information was based on publicly available information.

The final avenue of attack on the government’s affidavit is the constancy of Ms. Khan’s statements.  These are presented in the government’s affidavit as being straightforward.  But the defendant’s lawyers received, as they routinely do in discovery, copies of the F.B.I. interviews, known as 302’s.  These interviews viewed over time show changing stories from Mr. Khan, and government investigators were aware of this when they presented the affidavit for the wiretap to the judge.  But the affidavit softens the changing versions.  It omits any reference to her obstruction of the investigation although, by her initial concealing of facts, this is arguably what she did.  Instead, the affidavit describes her as having been proven to be reliable.

Wiretaps are granted only after other investigative methods have been tried unsuccessfully or would be unsuccessful if tried.  The affidavit does not detail other investigative methods but states that other investigative attempts have failed.  In fact, Rajaratnam and his hedge fund, Galleon Group, were responding to a series of discovery demands, subpoenas and inquiries, and Rajaratnam’s lawyers claim they were cooperating with the government.  Obviously, the government did not agree, else the government would not have sought the wiretap.  The government was on the trail of unusual transactions, and it wasn’t getting the explanations with the methods they had tried.