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Ruling allowing wiretaps in some financial fraud cases could lead to more surveillance in insider trading probes

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Nov. 24 (Bloomberg) -- Daniel Horwitz, a partner at Lankler & Carragher LLP, discusses the investigation into possible insider trading at hedge funds. Horwitz speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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Washington Post Staff Writer
Wednesday, November 24, 2010; 7:25 PM

A federal judge ruled Wednesday that prosecutors could use surveillance of telephone conversations in some financial fraud cases. The decision validates a tool that investigators had sought to use in probing allegations of insider trading and could open the door for greater monitoring of computers, mobile devices and cellphones in probes of potential financial wrongdoing.

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The ruling came in the broad criminal case on insider trading charges against Raj Rajaratnam, the founder of Galleon Group, a New York hedge fund. Rajaratnam and nearly two dozen associates are accused of illegally trading stocks based on confidential information. In the case, which was unveiled in early 2009, prosecutors for the first time employed wiretaps as part of an insider trading investigation.

The ruling came at the same time that prosecutors are intensifying another insider trading probe. On Wednesday, federal agents made the first arrest as part of this sweeping new probe, detaining in New York a consultant accused of funneling inside information to hedge fund managers.

In the Galleon case, prosecutors said they recorded thousands of conversations in 2008 between Rajaratnam and his associates. Historically, wiretaps have been reserved for terrorism, organized crime and drug trafficking cases out of concern that using the aggressive surveillance technique for lesser crimes would not respect privacy rights guaranteed by the Constitution. Rajaratnam's lattorneys sought to prevent the recorded conversations from being used in court.

His attorneys argued that federal law precludes the use of wiretaps for securities fraud, reserving it for more "serious crimes." They also argued that prosecutors failed to rely on more conventional techniques, such as depositions and documentary evidence, to build their case.

Judge Richard J. Holwell of the Southern District of New York rejected those arguments.

He acknowledged that federal law does not expressly allow wiretaps to be used in insider trading cases. But he argued that it does allow for wiretaps to be used in investigations regarding wire fraud - the use of electronic communication across state lines to commit a crime - and wire fraud routinely occurs in connection with securities fraud.

"When the government investigates insider trading for the bona fide purpose of prosecuting wire fraud," as in the Galleon case, the judge wrote, "it can thereby collect evidence of securities fraud."

Holwell also wrote that more conventional investigative techniques were not sufficient to "uncover the scope of Mr. Rajaratnam's alleged insider trading ring and was reasonably unlikely to do so because evidence suggested that Rajaratnam and others conducted their scheme by telephone."

Rajaratnam is expected to be tried next year. He has pleaded not guilty.

The ruling was a victory for federal prosecutors, who have insisted that using wiretaps is necessary for fighting insider trading.

"Illegal insider trading is rampant and may even be on the rise," U.S. Attorney Preet Bharara said last month in a speech to the New York City Bar Association.

"Some have asked, why use court-authorized wiretaps in insider trading cases?" Bharara said. "The quick answer is that every legitimate tool should be at our disposal - especially where, as in the case of insider trading, an essential element of the crime is a communication. It does not take a rocket scientist to understand that it would be helpful to have the actual recording of the communication."

Meanwhile on Wednesday, the arrest of executive Don Ching Trang Chu in New York was the first of what could be a string of charges brought against financial professionals, analysts, consultants and others in a wide-ranging federal investigation into insider trading.

In recent years, federal agents have raided the offices of three prominent hedge funds and sent information requests to several others.

Prosecutors said Chu, who worked for California-based Primary Global Research, set up meetings in which insiders at public companies provided confidential information about quarterly earnings statements to hedge fund managers.

Jeffrey Plotkin, an attorney for Chu, declined to comment.

Primary Global Research was not named in the complaint. A spokesman for Primary Global Research said Chu had worked as the company's Taiwan liaison for about seven years. "Based upon recent events, PGR has severed its relationship with Mr. Chu," the spokesman said.

It is not clear what, if any, connections will emerge between the Galleon case and the new insider trading probe. One firm that was raided has connections to Galleon, but any role that will play in a future criminal case has not been made public.



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