Watch Out, The Government Is (Lawfully) Listening: Second Circuit Greatly Expands Use of Wiretaps In White Collar Criminal Cases

Last week was a huge week for the Supreme Court. I’ll leave it to the experts to talk about DOMA, Prop 8 and the Voting Rights Act.  And let’s not forget that there were a few important criminal cases that did nothing good for defendants’ constitutional rights. The Supreme Court allowed individuals who are arrested to undergo a mouth swab for DNA to be placed in a massive database (Maryland v. King). Even more troubling, prosecutors can now tell a jury that a non-custodial suspect refused to answer a police officer’s question (Salinas v. Texas), thus degrading the Fifth Amendment even further. There’s great commentary on these cases, from SCOTUSBlog to the White Collar Crime Prof Blog.

Not to be left behind, the Second Circuit—always a hotbed of white collar criminal prosecutions—issued two recent decisions on the use of wiretaps in white collar cases.  These decisions will unquestionably be used by the government in jurisdictions beyond the Second Circuit to expand its use of wiretaps in white collar criminal cases.

United States v. Rajaratnam, No. 11-4416-cr (2d Cir. June 24, 2013) 

The Second Circuit upheld Mr. Rajaratnam’s appeal of his 2011 insider trading conviction.  The former Galleon Group co-founder had attacked the legality of the wiretaps that were used at his trial.  He argued that his conviction should be overturned because the government had improperly obtained the Title III wiretaps by leaving out key facts in the application.

To obtain wiretaps under Title III, the government must explain

whether or not other investigative procedures have been tried and failed or why they reasonably appear to be unlikely to succeed if tried or to be too dangerous.

Mr. Rajaratnam pointed out that the government failed to include in its application the fact that the SEC had already deposed him and also obtained over 4 million documents from him.

The Second Circuit concluded that these points actually supported the government because even with these investigative tools, the government lacked sufficient evidence to indict Mr. Rajaratnam.  So, concluded the court, the wiretaps were “necessary.”  It disagreed with the lower court’s finding that the omissions were made with “reckless disregard for the truth” but agreed that the omissions were not “material” facts.

Interestingly, the court also assumed that Title III authorizes wiretaps in insider trading cases, even though it is not one of the enumerated offenses in the statute. However, a few days later in Goffer, it addressed this issue more directly. (Spoiler alert: Yes, Title III allows wiretaps in insider trading cases.)

United States v. Goffer¸ No. 11-3591 (2d Cir. July 1, 2013)

The Second Circuit upheld the convictions of three defendants for their role in the Galleon insider trading investigation.  Zvi Goffer,  Michael Kimelman and Craig Drimal were traders who were associated with Galleon in some way. They were all convicted of securities fraud based on part on the government’s wiretaps. (Drimal pleaded guilty; Goffer and Drimal were found guilty after a jury trial.)

They raised several arguments on appeal but I’ll focus on the primary one related to the wiretaps.

The defendants argued that they were convicted of securities fraud, and securities fraud is not one of the enumerated offenses for which wiretaps may be obtained under Title III.    The Second Circuit relied on the 2010 district court holding in Rajaratnam allowing these wiretaps:

[W]hen the government investigates insider trading for the bona fide purpose of prosecuting wire fraud, it can thereby collect evidence of securities fraud, despite the fact that securities fraud is not itself a Title III predicate offense.

Note that this holding by the district court in 2010 was not specifically appealed by Mr. Rajaratnam in his recent Second Circuit appeal. But that’s of no import now.  The Second Circuit has transformed the holding of the lower court into binding precedent.

As the court concluded, the fact that the defendants in Goffer were being investigated for securities fraud, this “did not immunize Defendants from otherwise lawful interception of communications related to their wire fraud.”  The court concluded the evidence was lawfully obtained.

This entry was posted in Appeal, Insider Trading, Securities fraud, Wire Fraud, Wiretaps. Bookmark the permalink.

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