Raja 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 wiretap authorization.
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 U.S. Attorney.
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 necessity.
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 case.
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 Court.