If Wall Street thinks it has been treated shabbily by Washington, it soon could get a lot worse.
Yesterday, a federal judge in Manhattan listened to arguments about whether to allow thousands of recorded phone conversations as evidence in the upcoming criminal trial of Raj Rajaratnam, the Galleon Group hedge fund founder accused of illegal trading.
If the judge rules in favor of federal prosecutors, who want the wiretap evidence heard, it could lead to a lot more bugged phones on Wall Street.
Although the Dept. of Justice (DOJ) has often used wiretaps in organized crime and drug-trafficking cases, prosecutors usually rely on trading and phone records to build an insider-trading case, rather than taped phone conversations.
“While wiretaps have been used successfully by DOJ against organized crime syndicates and drug traffickers, DOJ’s success in obtaining wiretaps in the Galleon case may embolden it to seek court authorization for electronic surveillance in future insider-trading investigations,” lawyers at Day Pitney LLP wrote in a white-collar crime newsletter earlier this year.
Attorneys for Rajaratnam told US District Judge Richard Holwell that Congress never intended for wiretaps to be used in insider-trading probes because the law that governs phone surveillance never mentions it.
“Buying or selling a stock is not at all like buying or selling cocaine or discussing a violent crime,” said Terence Lyman, a lawyer for Rajaratnam.
Government prosecutors argue they were investigating wire fraud, which often goes hand-in-hand with insider trading, and where wiretapping is allowed.
Surveillance experts say the judge is more likely to side with the government on this point, and if Holwell throws out the wiretaps, it will be because of other issues, such as whether investigators misled the judge when seeking the wiretap authorization.
“It would be a good argument if the only thing you can wiretap is the Mafia and drug cartels, but it’s not,” said Marc Zwillinger, an electronic-surveillance expert. He added that the law lists a hodgepodge of seemingly lesser crimes approved for wiretapping, including “aircraft parts fraud.”
“Either [insider trading] was an oversight or [Congress] assumed it was included with wire fraud,” Zwillinger said.
While government prosecutors made great fanfare in the Galleon case, claiming it was the first time they had used wiretaps in a “significant” insider-trading investigation, James Wedick, a former FBI agent and surveillance expert, said the practice is already pretty common.
“I had to laugh a little,” he said.