Wiretaps Revolutionize White-Collar Crime Prosecution

January 15, 2013

Wiretaps revolutionize white-collar crime prosecution

After a long history of success in the investigation of drug crimes, wiretapping has recently gained momentum as a tool for the prosecution of insider trading and other white-collar crimes.

In what has been widely regarded as a turning point for white-collar criminal prosecution, Raj Rajaratnam, co-founder of the hedge fund management firm Galleon Group, was convicted in May 2011 of insider trading and conspiracy charges supported largely by evidence obtained from wiretaps. Experts believe that the Galleon case may have forever changed the way that insider trading and other white-collar crimes are prosecuted in the United States.

Federal authorities have devoted a great deal of time and energy to investigating and prosecuting insider trading cases in the years since the collapse of the U.S. banking industry; at least 75 individuals have been charged since 2008, National Public Radio reported, and their techniques appear to be growing more effective.

After many years of struggling -- and often failing -- to make insider trading charges stick with traditional investigatory techniques, investigators had grown frustrated by the difficulty of penetrating the tight-knit circles in which insider trading often takes place. Without sources on the inside, they were rarely able to obtain enough evidence to sustain a conviction, and getting insiders to cooperate with investigators was nearly impossible.

Same methods used to investigate organized crime

Realizing that a change was necessary, federal authorities decided to begin prosecuting insider trading with the same techniques that are used to crack down on organized crime. Key among these methods is the use of wiretaps, both as direct evidence during criminal prosecution and as leverage to ensure the cooperation of potential informants. Since 2008, at least 12 individuals have agreed to cooperate with investigators after being recorded engaging in illegal activity related to insider trading, according to the NPR report.

Before investigators began using wiretaps in insider trading cases, it was often very difficult to draw the line between criminal conduct and the day-to-day financial transactions of hedge fund managers and other financial executives, since these individuals buy and sell stock constantly and can typically find an analyst report to justify any individual transaction. As a result, the fact that a particular transaction coincides with a telephone call is less likely to be viewed as credible evidence of insider trading.

In the Galleon case, however, investigators took the largely unprecedented step of recording over 2,400 of Rajaratnam's telephone conversations, many of which included statements by him that he had received an inside tip and was planning to trade on it. Rajaratnam was convicted of conspiracy and securities fraud, and is currently serving an 11-year prison sentence. He was also sentenced to pay a $10 million criminal fine and forfeit $53.8 million, the Wall Street Journal reported.

Legality of Galleon wiretaps questioned

Rajaratnam has appealed his conviction on the grounds that the wiretaps were not properly authorized and should have been suppressed at trial. The federal Wiretap Act requires government investigators to demonstrate to a judge that a wiretap is necessary due to the failure of other investigatory methods or a reasonable expectation that such methods are unlikely to succeed. Because wiretaps involve a significant invasion of privacy, this requirement is intended to ensure that wiretaps are not used unnecessarily.

When facing potential criminal charges of insider trading or other financial crimes, it is important to seek help from a knowledgeable attorney who is experienced in the area of white-collar criminal defense.

Article provided by Ann Fitz, Attorney at Law, PC
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