This time, will the SEC get its man?
The SEC has snagged a big fish, but it remains to be seen if the securities cops and…
The SEC has snagged a big fish, but it remains to be seen if the securities cops and the United States Attorney’s office are up to reeling in their catch.
Given recent Securities and Exchange Commission fishing expeditions, landing Galleon Group founder Raj Rajaratnam may not be as easy as everyone thinks.
Investors and industry observers alike are hoping that the agency handled its investigation of Mr. Rajaratnam with greater care than it exhibited in the Madoff case.
In October, the SEC accused Mr. Rajaratnam and others of carrying out a scheme that produced $33 million in illicit profits via trading on secret details of corporate takeovers and quarterly earnings leaked by company insiders.
The Galleon Group investigation is noteworthy for being the first time the government used wiretaps to bring an insider-trading prosecution. Typically, wiretaps are reserved for investigations into organized crime, drug syndicates and suspected terrorism.
Mr. Rajaratnam’s lawyers are fighting back, attacking major aspects of the United States Attorney’s office civil lawsuit, including the legality of wiretap evidence and the credibility of a potential star witness for the prosecution.
The defense team has argued that the United States Attorney’s office’s wiretaps violated Mr. Rajaratnam’s constitutional rights because such surveillance is allowed only for gathering evidence of specific suspected crimes when alternative investigative means “have been tried or appear unlikely to succeed,” as required under the Wiretap Act of 1968.
The defense team also argued that investigators had obtained court authorization for the wiretaps in part by stating that federal informant Roomy Khan, a former Galleon employee, had “not yet been charged with any crimes.”
Ms. Khan, however, was convicted on wire fraud charges in 2001. As part of a cooperation deal with federal investigators, she also pleaded guilty to destroying evidence in 2008. And she “fabricated evidence” in a California civil case, the defense team alleges.
Some legal eagles have weighed in, and many have publicly opined, that if the wiretaps are suppressed, the case won’t be destroyed, but it will definitely suffer a big dent.
Anxiously awaiting the outcome are unscrupulous money managers who wonder if this will be the first of many successful, tough-fisted insider-trading prosecutions aimed at the $1.5 trillion hedge fund industry.
Mr. Rajaratnam’s lawyers say the government misled courts in seeking authority for wiretaps in 2007 by claiming that forgoing wiretaps would be “too risky” and could “seriously compromise the entire insider trading investigation.”
Mr. Rajaratnam’s lawyers also contend that by 2007, the money manager had already been interviewed under oath by the SEC in another unnamed hedge fund investigation and had been questioned about the investments that eventually led to the charges against him.
Galleon had also submitted tons documents at the SEC’s request during the investigation while they were seeking authority for the wiretaps, the defense filing claims.
Those actions, Mr. Rajaratnam’s lawyers argue, contradicted the government’s assertion that the wiretaps were necessary because there was no other way to conduct the investigation of him and his firm, and rendered the surveillance unconstitutional.
Legal experts say that the SEC must do a solid job of separating the alleged insider-trading information from mere market noise in order to have a chance to win the case against Mr. Rajaratnam. And it must be prepared before entering the courtroom.
While that sounds like common sense, let’s remember how inept the SEC looked a few months ago when the agency was challenged by U.S. District Court Judge Jed Rakoff. The irate judge held the SEC’s feet to the fire when he denounced the $33 million settlement worked out between the agency and Bank of America Corp.
In that settlement, the SEC broke from its tradition of seeking to place the primary penalty on individuals responsible for disclosure violations — which the judge correctly challenged.
In the Rajaratnam case, the big fish is on the hook. If he’s guilty, it would be a damn shame if the government let him swim away.
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