NEW YORK (AP) – Wiretaps traditionally used to build drug and organized crime cases can be used in the trials of insider trading defendants, a judge ruled Wednesday, clearing Constitutional obstructions for upcoming trials in what a prosecutor has called the biggest hedge fund insider trading case in history.
U.S. District Judge Richard Holwell ruled in Manhattan, where defendants Raj Rajaratnam and Danielle Chiesi had challenged the use of wiretaps in a prosecution announced a year ago. The probe resulted in 23 arrests and 14 guilty pleas, with many of the convicted individuals cooperating.
Rajaratnam, a onetime billionnaire who founded the Galleon Group of hedge funds, and Chiesi have pleaded not guilty to securities fraud charges alleging they shared inside information. They are both free on bail and awaiting trial. A spokesman for Rajaratnam’s lawyers was not immediately available for comment. A lawyer for Chiesi did not immediately return a message for comment.
In a related ruling Wednesday, Holwell said Rajaratnam and Chiesi can be tried together on some charges but not on others.
The decision on wiretaps had been eagerly awaited after U.S. Attorney Preet Bharara repeatedly trumpeted the vital role wiretaps can play in insider trading cases over the last year.
Bharara said in October 2009 when Rajaratnam and Chiesi were arrested that the case represented the first time court-authorized wiretaps have been used to target significant insider trading on Wall Street. He said the wiretaps captured conversations in which Rajaratnam and Chiesi shared secrets.
“There was one secret they did not know: we were listening,” Bharara said then.
In a speech a month ago, Bharara said wiretaps were especially useful in insider trading probes because 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,” he said. “Recordings are the absolute best evidence, and so we will not shrink from using them.”
Lawyers for Rajaratnam and Chiesi argued that the wiretaps should be disallowed because federal law does not authorize the use of wiretaps to detect insider trading and because information provided to judges who approved them was insufficient.
“This court does not hold that insider trading is always good grounds for a wiretap,” Holwell wrote. “It holds only that, when the government investigates insider trading for the bona fide purpose of prosecuting wire fraud, it can thereby collect evidence of securities fraud.”
He said the evidence could be collected even though insider trading is not specifically listed in federal law as an offense for which wiretaps can be authorized.
Holwell added that Rajaratnam and Chiesi “would have this court bar the government from using wiretaps for wire fraud investigation whenever the fraud concerns securities. That is a carve-out Congress has not made and this court is not permitted to make in its stead.”
To some extent, Holwell agreed that the wiretaps application was insufficient, saying Rajaratnam had proven that the government’s application “omitted and misstated important information regarding the credibility of a key government informant.”
But the judge added that suppression of the wiretaps was not required because the remainder of the application demonstrated “ample reason to find probable cause.”
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