Wiretaps Helped Get Hedge Fund Manager Convicted

Wiretaps played an important role in the government's case against a billionaire hedge fund manager Raj Rajaratnam, who was convicted on 14 counts of securities fraud and conspiracy. The guilty verdict is being appealed, and it's expected the legal team will question whether the wiretaps were legal.

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And I'm Renee Montagne.

He's a billionaire hedge fund manager with ties to some of the biggest names in business, and yesterday Raj Rajaratnam was convicted on 14 counts of securities fraud and conspiracy. This was a high profile case for government prosecutors, who are cracking down on insider trading on Wall Street. And it highlights a new tactic in fighting this kind of white collar crime.

NPR's Tamara Keith explains.

TAMARA KEITH: Raj Rajaratnam had connections with insiders at Intel and Goldman Sachs among others. And jurors found he used those connections to get material non-public information. He then used that information to make stock trades that brought in more than $60 million in gains. The jury found Rajaratnam guilty on all counts.

Mr. TONY BARKOW (Center on the Administration of Criminal Law, NYU): This is a huge win for the government.

KEITH: Tony Barkow heads the Center on the Administration of Criminal Law at NYU, and he's a former prosecutor. He says in the past insider trading cases were hard to make.

Mr. BARKOW: It's hard to prove exactly what kind of information someone had when they traded unless you can somehow basically get inside their brain and show why they traded.

KEITH: But in this case, the government had the next best thing.

(Soundbite of ringing phone)

KEITH: Wiretaps.

(Soundbite of ringing phone)

KEITH: In this call, Rajaratnam is relaying to an associate a tip he got from a Goldman Sachs board member about the company's performance.

(Soundbite of recording)

Mr. RAJ RAJARATNAM (Galleon Group): I heard yesterday from somebody who was on the board of Goldman Sachs that they are going to lose $2 per share. The street has them making $2.50.

Unidentified Man #1: Really?

Mr. RAJARATNAM: Yeah.

KEITH: In another call, presented at trial, Rajaratnam tells colleagues about information he's gotten on the chip maker Spansion.

(Soundbite of recording)

Mr. RAJARATNAM: One thing we know, this is very confidential, is that somebody is going to put a term sheet for Spansion.

KEITH: He then lays out a plan to set up an email trail to cover their tracks.

(Soundbite of recording)

Mr. RAJARATNAM: Or I'll send something like, you know, there's a basket of semiconductor companies like Lattice, Spansion and Atmel.

Unidentified Man #2: Right.

Mr. RAJARATNAM: See what you think. And you should say Atmel and Spansion were good. You know, so that we just protect ourselves.

Unidentified Man #2: Have a corporate record.

KEITH: NYU's Tony Barkow says this evidence, in combination with testimony from cooperating witnesses, made for a very powerful case.

Mr. BARKOW: Rajaratnam was caught on tape saying things like, to the effect of, you know, we have our guy, we have our information that no one else has. And that's basically the essence of insider trading. And so in some ways he was caught red-handed.

KEITH: Rajaratnam's attorney says he'll appeal the verdict. Robert Heim, a defense attorney who's working on similar insider trading cases, says it's likely to come down to the wiretaps.

Mr. ROBERT HEIM (Attorney): There's a very strict statute that governs the use of wiretaps. There's some question about whether or not wiretaps are permissible to be used as evidence against a person charged with insider trading and securities fraud. That's going to be the most likely avenue for appeal.

KEITH: Wiretaps have typically been used in organized crime, drug and terrorism cases. But their use is new in white collar securities cases. Heim says if the appeals court upholds the Rajaratnam conviction, it will set a strong precedent for the use of wiretaps and change the way insider trading is prosecuted going forward. But many think things have already changed. Many of Rajaratnam's associates plead guilty and wiretaps have led prosecutors to numerous other insider trading cases.

Jay Brown is a law professor at the University of Denver.

Professor JAY BROWN (University of Denver): It has now become clear enough that you can use wiretaps in insider trading cases, and so they will become common now, I think.

KEITH: And he says those who would break the law are going to learn a lesson from Rajaratnam.

Prof. BROWN: I think what this case will do is it will get insider traders off the phone, or at least off a phone that can be wiretapped.

KEITH: What Brown doesn't expect it to do is stop insider trading. Because for some the temptation is just too much to resist.

Tamara Keith, NPR News.

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