Rajaratnam Slams Wiretaps, Cites Analysts in Defense

Professor James Cohen in Bloomberg, November 24, 2009

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 Nov. 24 (Bloomberg) -- Attorneys for Galleon Group founder Raj Rajaratnam denied a U.S. regulator’s claims he engaged in insider trading, saying he based investments on analyst research and media reports and that government wiretaps were illegal.

Rajaratnam’s filing in response to a Securities and Exchange Commission lawsuit, which came today in Manhattan federal court, includes a broad attack on the regulator’s lawsuit. He will likely advance the same arguments in a pending criminal case against him.

“Mr. Rajaratnam denies that he received and/or traded on the basis of material non-public information” in eight stocks, defense attorney John Dowd wrote. Galleon “analysts conducted their own examination of the companies at issue” and developed research that “was more detailed and precise” than any of the tips Rajaratnam allegedly got, Dowd said.

Rajaratnam, 52, was arrested on Oct. 16 and accused by federal prosecutors of earning millions of dollars from stock trades made with inside information from corporate executives. The SEC filed parallel civil lawsuits against him and more than 20 other hedge fund executives and corporate insiders, in many cases basing claims on telephone calls covertly recorded by criminal authorities. The case is the first insider trading prosecution based on telephone wiretaps.

Preliminary Stage

The criminal case has yet to move past preliminary stages, while the SEC’s case is assigned to a judge who has scheduled a trial for Aug. 2. The judge may decide whether the evidence from wiretaps may be admitted at the trial.

Rajaratnam’s defense has three strands, which he is likely to use in both the civil and criminal cases.

Rajaratnam says he has an innocent explanation for his trades, based on research by Galleon analysts and on published media reports. Second, he says the SEC shouldn’t be free to use evidence from illegal wiretaps. Third, he assails a star government witness, former Intel Corp. executive Roomy Khan, as a liar unworthy of belief.

“The government’s unprecedented use of electronic surveillance in this case violated” Rajaratnam’s constitutional rights, Dowd said in his answer. “Electronic surveillance is permitted only when necessary for the investigation of specific crimes and only when alternative investigative procedures have been tried or appear unlikely to succeed.”

Many Documents

When seeking authorization for wiretaps, criminal investigators didn’t call to the court’s attention that the SEC had already interviewed Rajaratnam and other witnesses “under the guise of an investigation of another unrelated hedge fund,” Dowd wrote. Galleon had also given the agency tens of thousands of pages of documents, he said.

“The government misrepresented to the court that interviews of Mr. Rajaratnam and others could not be done and were ‘too risky,’ and that a ‘failed interview’ would ‘seriously compromise the entire insider trading investigation,’” Dowd said.

John Fahy, a former U.S. prosecutor now in private practice at Fahy Choi in Rutherford, New Jersey, said Rajaratnam’s lawyers will have a hard time persuading U.S. District Judge Jed Rakoff, who is presiding over the SEC case, to exclude evidence gathered from wiretaps.

Fahy said that while the wiretaps were under way, prosecutors were required every 10 days to present portions of transcripts of Rajaratnam’s conversations to a judge, who then had to conclude there was enough evidence of Rajaratnam’s wrongdoing for the taps to continue. Prosecutors had no duty to inform the judge that Khan, a star government witness, had been convicted of crimes, Fahy said.

‘Going Nowhere’

The bid to exclude the wiretap evidence “is going nowhere,” said Fahy, who isn’t involved in the case. Prosecutors will argue in court that they couldn’t directly ask Rajaratnam whether he traded on secret tips, Fahy said.

“He wasn’t going to say, ‘Yeah, I got this information, yeah, I got that information,’” Fahy said. “It would be very hard for a judge to throw it out on that basis.”

James Cohen, a professor of criminal law at Fordham University Law School in New York, agreed, saying the chances of the wiretaps being ruled illegal are “a tiny shred above zero.” He said the government will argue that unless Rajaratnam was prepared to admit his guilt in interviews with regulators, “it would have been futile” to ask him whether he was trading on secret tips.

“We look forward to presenting our case in court,” SEC spokesman John Heine said.

Yusill Scribner, a spokeswoman for U.S. Attorney Preet Bharara, who brought the criminal case, declined to comment.

Public Information

Another part of the answer says confidential information received by Rajaratnam was already public and investments were made under a Galleon strategy that was in place before he allegedly got tips, the lawyers said.

“Galleon employed professional analysts who covered companies and provided in-depth analysis that was utilized for investment decisions,” Dowd wrote.

Khan, the former Intel executive, once worked at Galleon and has emerged as a key witness in the case. She has pleaded guilty and is cooperating with prosecutors. Dowd notes in his answer that Khan has pleaded guilty to two federal felonies, destroyed evidence in a government investigation, and lied in a civil lawsuit.

Other defendants in the SEC’s case will file their answers on Dec. 9.

The case is SEC v. Galleon Management LP, 09-cv-8811, U.S. District Court, Southern District of New York (Manhattan).