NY lawyer accuses feds of gaming the system to get wiretaps in hedge fund insider trading case

Monday, October 4, 2010

NY lawyer: Feds gamed system in hedge fund case

NEW YORK — Government lawyers “gamed the system” to obtain permission to wiretap phones and build a $50 million insider trading case against a wealthy hedge fund founder, a defense lawyer told a judge Monday.

Raj Rajaratnam, 53, and his Galleon Group family of hedge funds were the victims of dirty tricks by federal prosecutors who convinced a judge they could not get evidence they needed without eavesdropping on telephone calls, defense attorney John Dowd said.

Dowd claimed that prosecutors misled a judge who approved the wiretaps by making scant mention of their participation in a probe begun by the Securities and Exchange Commission. That investigation had already resulted in millions of pages of documents, including e-mails, trading records and phone records, he said.

“In short, your honor, they gamed the system,” Dowd told U.S. District Judge Richard J. Holwell in Manhattan.

Assistant U.S. Attorney Jonathan Streeter said investigators did nothing “knowingly deceitful” when they applied to put wiretaps on the phone of Rajaratnam and others in a case described by prosecutors as the largest hedge fund insider trading prosecution in U.S. history.

“There’s nothing nefarious about it,” Streeter said. “It would be bad government if we didn’t work with the civil authorities.”

Streeter said the wiretaps were essential because a year-and-a-half probe by the SEC had failed to produce adequate criminal evidence.

The prosecutor said the SEC investigation had achieved “extremely limited success in discovering the source of inside information to Raj Rajaratnam” and the full scope of the fraud.

Charges announced last fall were brought against 21 people, 12 of whom have already pleaded guilty. Rajaratnam has pleaded not guilty and is free on $100 million bail. If convicted, he could face up to 185 years in prison.

Holwell had scheduled Monday’s hearing, saying Rajaratnam had made a “substantial preliminary showing that the government recklessly or knowingly misleadingly omitted several key facts” from a March 7, 2008, affidavit seeking permission for wiretaps.

He said the existence and scope of the SEC investigation raised a substantial question as to whether the government affidavit adequately demonstrated the necessity of a wiretap, which would require that the government showed the conventional investigative techniques had been tried and failed or were likely to fail.

He said the omitted facts included the existence of a lengthy SEC investigation that generated some 4 million documents, a prior FBI investigation of Rajaratnam’s connection to insider trading and the fact that Galleon employees including Rajaratnam had submitted to formal interviews with the SEC.

In court papers, the government said its wiretap of Rajaratnam’s phone led it to seek a wiretap on the phone of co-defendant Danielle Chiesi. Chiesi, 44, has pleaded not guilty.

Chiesi, who worked for New Castle, the equity hedge fund group of Bear Stearns Asset Management Inc., watched Monday’s proceedings as a spectator. If convicted, she faces up to 155 years in prison.

Rajaratnam briefly testified Monday, saying he was satisfied with his lawyer and did not want a new one, despite a potential conflict of interest Dowd might have because his firm also represents a witness in the case.

Witnesses at Monday’s hearing included a former lawyer for Galleon Group who said the SEC had been probing activity in the company’s 14 hedge funds since 2003 and Andrew Michaelson, a special assistant U.S. attorney who began working on the Galleon probe for the SEC’s division of enforcement in October 2006.

Michaelson said the investigation started because the SEC suspected the Galleon Fund was designating its most successful trades in four of its funds to a fund that included investments from family members and friends.

He said criminal investigators were introduced to the case in March 2007.

“The SEC and criminal authorities worked together on this case and it was a successful case,” he said. “The entities were working closely together.”

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