Raj Rajaratnam, the founder of the Galleon Group hedge
fund lost his appeal on insider trading charges. U.S. v. Rajaratnam, Docket
No. 11-4416-cr (2nd Cir. Decided: June 24, 2013). Mr. Rajaratnam was
convicted on five counts of conspiracy to commit securities fraud and nine
counts of securities fraud by a jury following a lengthy insider trading trial.
He is currently serving an eleven year prison term.
The focus of Mr. Rajaratnam's appeal was his challenge to
the district court's conclusion that the wire tap evidence was admissible. His
case is one of the first insider trading cases to make extensive use of wiretap
evidence. The district court admitted evidence drawn from eight wiretaps which
began with one of Mr. Rajaratnam's cell phone in March 2008. In admitting the
evidence the district court considered two critical questions when securing the
wiretaps: a) whether there was probable cause to wiretap the cell phone; and b)
why the proposed tap was necessary.
In the initial application to establish probable cause
the government presented statements made by Mr. Rajaratnam to Roomy Kahn and
summarized conversations between the two which Ms. Kahn had taped, indicating
that they had discussed inside information. To demonstrate "necessity" the
government told the court that the use of grand jury subpoenas, the collection
of documents and taking testimony had failed or appeared reasonably unlikely to
succeed if tried. The district judge who considered this evidence issued the
Mr. Rajaratnam moved to suppress the wiretap evidence,
claiming that the government made misstatements and omissions regarding the
reliability of Roomy Khan and that the evidence regarding "necessity" was
materially incomplete. Specifically, he argued that the government told the
court in the wiretap application that Ms. Khan had not been charged with any
crimes when in fact she had previously pleaded guilty to felony wire fraud
while incorrectly stating the period in which she had been cooperating with the
FBI. The government also failed to tell the court that Mr. Rajaratnam and
Galleon had been the subject of an ongoing SEC investigation, that several
Galleon employees had testified in that inquiry and that about four million
pages of documents had been produced which were subsequently conveyed to the
The district court concluded that in fact the search
warrant application incorrectly stated Ms. Kahn's background and the period of
time she had been cooperating with the FBI. Two statements attributed to Mr.
Rajaratnam were also incorrectly summarized and the evidence on "necessity"
contained what the court called a "glaring omission." Nevertheless, the
district court refused to suppress the evidence finding that despite the errors
and omissions there was sufficient evidence to establish probable cause and
The Second Circuit, while not agreeing with all the
findings of the district court, affirmed. The analytical framework for
evaluating the wiretap issue has been established by the Supreme Court's
decision in Franks v. Delaware, 438 U.S. 154 (1978) and is well grounded
in Second Circuit precedent. Under Franks suppression is only warranted
if it is demonstrated that the inaccuracies or omission in the affidavit are
the result of the affiant's deliberate falsehood or reckless disregard for the
truth and the alleged falsehoods or omissions were necessary to the probable
cause or necessity decision, according to the Court.
To establish deliberate falsehood or reckless disregard
the defendant must do more than demonstrate an omission or error. Rather, "the
reviewing court must be presented with credible and probative evidence that the
omission of information in the wiretap application was 'designed to mislead' or
was 'made in reckless disregard of whether [it] would mislead.'" Here, even
assuming that this standard was met with regard to Ms. Kahn's background and
the two paraphrased statements, the errors were not material to the district
court's determination and analysis on the probable cause issue. To the
contrary, there were sufficient facts before the judge who issued the search
warrant to establish probable cause.
Equally clear is the fact that the omission of evidence
about the SEC investigation does not meet the required standard. In reviewing
the district court's finding de novo, the Court of Appeals rejected the
conclusion that this was a glaring error. The representatives of the U.S.
Attorney's Office testified that the point about the SEC investigation simply
did not occur to them. And, in any event the evidence actually supported the
application for a warrant the appeals court concluded because many of the
documents and chronologies compiled by the SEC demonstrated that "Mr.
Rajaratnam had been careful to exchange nearly all of his inside information by
telephone." This meant that wiretaps were "particularly appropriate" in this
Finally, the Court rejected Mr. Rajaratnam's claim that
the jury instructions were erroneous. Those instructions specified in part that
the jury had to find that the material non-public information given to Mr.
Rajartanam "was a factor, however small" in his decision to buy or sell the
stock. The claim that this permitted the jury to convict him without finding
the necessary causal connection between the inside information and the trades
executed is incorrect the Court found. To the contrary, the jury is only
required to find that the defendant purchased or sold the securities while
knowingly in possession of material non-pubic information. According, the instruction
given here was "if anything more favorable" to Mr. Rajaratnam" than the
required "knowing possession standard." Thus, like the claim about the wiretap
evidence, the alleged error regarding the jury instructions was rejected by the
For more commentary on developing securities
issues, visit SEC Actions, a blog by Thomas
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